May 8 (Bloomberg) -- The European Central Bank and the Bank of England kept interest rates unchanged today, trying to balance the risk of faster inflation against the danger that higher credit costs will drag down economic growth.
The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent, as predicted by all 53 economists surveyed by Bloomberg News, and President Jean-Claude Trichet signaled it won't cut rates anytime soon. The Bank of England, which has lowered rates three times since early December, left its benchmark at 5 percent, still the highest among the Group of Seven nations.
With soaring food and energy prices pushing inflation above 3 percent in the 15-nation euro region, the ECB is reluctant to follow the U.S. Federal Reserve in easing borrowing costs to shore up economic growth. The Bank of England is more likely to act before the ECB as U.K. house prices drop and policy makers fret about the risk of a recession.
``The ECB is effectively in neutral, while the Bank of England has an easing bias that's tempered by inflation concerns,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. Economists forecast the U.K. central bank will reduce its rate again in June while the ECB will move in September, separate surveys show.
The euro rose about a cent to $1.5433 after Trichet stressed the ECB remains focused on curbing inflation even after it slowed to 3.3 percent in April from 3.6 percent in March, a 16-year high. The ECB aims to keep inflation just below 2 percent.
`Protracted Period'
``Inflation rates are expected to remain high for a rather protracted period of time before gradually declining again,'' Trichet said at a press conference in Athens. ECB policy makers meet outside Frankfurt twice a year.
The Bank of England, in line with its usual practice, didn't publish a statement with today's decision. Governor Mervyn King has said inflation may exceed the government's 3 percent limit later this year, which is making the central bank reluctant to accelerate the pace of rate cuts.
The Fed has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, attempting to fend off a recession. Federal Reserve Bank of Kansas City President Thomas Hoenig said May 6 that ``serious'' inflation pressures may compel the Fed to increase rates again.
The ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.
Food, Oil, Wages
Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.
``Inflation concerns are not abating,'' said Amit Kara, an economist at UBS AG in London who used to work at the Bank of England. ``We will get weaker growth and the question is how weak it will be. It's really a balancing act.''
Economic data have suggested Europe's economy is cooling. Executive and consumer confidence declined to the lowest level in more than two years in April and European retail sales dropped 1.6 percent in March from a year earlier, the most since at least 1995.
Exports from Germany, Europe's largest economy, unexpectedly fell for a second month in March, the country's statistics office said today.
`Aggressive Action'
In the U.K., policy maker David Blanchflower said on April 29 that the economy risks a recession unless the central bank takes ``aggressive action.'' U.K. house prices had the first annual decline since 1996 last month, consumer confidence fell to the lowest in at least four years and growth in service industries slowed to a five-year low.
The International Monetary Fund last month cut its global growth forecast and said the world economy faces a 25 percent chance of a recession.
The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year after the U.S. market for subprime mortgages, aimed at people with poor credit histories, collapsed. That's made banks reluctant to lend, pushing up the cost of credit and roiling financial markets.
Still, Trichet and U.K. central bankers have said in the past week there are indications that some markets are improving. Bank of England Deputy Governor John Gieve said May 1 that ``risk appetite will return gradually in the coming months.''
``First signs are appearing that the worst of the global financial turmoil may soon be over,'' said Holger Schmieding, head of European economics at Bank of America Corp. in London. ``For now, the ECB is firmly on hold.''
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