JULIA WERDIGIER
New York Times
Nov 4, 2010
LONDON — The Bank of England and the European Central Bank left their key interest rates at record lows Thursday after recent data showed that the economic recovery was showing some resilience.
A day after the U.S. Federal Reserve moved to pump another $600 billion into the banking system to strengthen the U.S. economy, the Bank of England decided against any new stimulus measures for Britain, leaving its bond purchasing program at £200 billion, or $322 billion. The main interest rate remains atf 0.5 percent.
At its meeting, the European Central Bank left its benchmark interest rate at 1 percent. Investor attention was focused instead on anything that E.C.B. President Jean-Claude Trichet might say later in the day about the bank’s plans to tighten monetary policy — even as the Fed moves in the other direction.
The Bank of England considered expanding purchases of government debt last month, but positive economic data released since then eased pressure for it to act.
The services sector, including banks and airlines, and manufacturing reported unexpected growth in October, and growth of Britain’s gross domestic product beat economists’ forecasts in the third quarter.
The Bank of England would find it “hard to justify further purchases without some evidence,” Jens Larsen, chief European economist at RBC Capital Markets in London and a former Bank of England official, said.
“The rebound has been pretty robust and inflation has surprised us on the upside,” he said. “At the same time there are clearly some big risks facing the economy. Quantitative easing is not off the table.”
The main risk for Britain’s sustained recovery is the government’s austerity program, which is expected to affect consumers beginning early next year. An increase in sales tax combined with deep cuts in government spending, including the elimination of an estimated 490,000 jobs, might slow the recovery despite the recent encouraging signs.
Signs that consumers hold back on spending because of job uncertainty have already been seen. Sales at Next, one of the biggest clothing retailers in Britain, fell in the third quarter, and the company expects the last three months of the year to be more difficult. Last month, house prices fell the most since January 2009, as buyers postponed investments and more property came to the market.
Many economists expect Bank of England policy makers to postpone any decision on more stimulus until next year, when the impact of the largest spending cuts since World War II becomes clearer. Britain’s opposition Labour Party has warned that the private sector might not be able to fill the gap and that spending cuts that are too extensive risk a recession.
At the same time, inflation remains well above the Bank of England’s target of 2 percent, making it harder for policy makers to argue for pumping more capital into the economy. But many economists expect interest rates to remain unchanged for at least six months, and the Bank of England has said that it expected inflation to drop by 2012.
The European Central Bank, which sets monetary policy for the euro zone, has left its benchmark interest rate at 1 percent since May 2009.
