ECB, BoE set to hold rates

August 1, 2001 Posted: 0518 GMT

LONDON (CNN) -- The European Central Bank and the Bank of England are expected on Thursday to leave interest rates on hold, even as economic growth slows.

Economists polled by CNN said they expected the ECB to hold rates at 4.5 percent, putting the battle against inflation ahead of the slowdown in growth.

A rate cut, the ECB's second this year, is expected when the ECB meets after its summer break on August 30. Meantime, the Bank of England will keep rates at 5.25 percent in Britain, the world's fourth-biggest economy, despite more profit warnings and job cuts from companies.

"Neither is going to move this side of the summer break." Jerry Wattenberg, managing director at Goldman Sachs, told CNN.

Ben Rudd, market strategist at HSBC, said: "The ECB will come through with a cut but it will wait to see what happens on the inflation front. They'll wait until this year's energy price increases come out of the (inflation) number, giving them leeway to cut rates.

"The U.K. is sitting on the edge. The industrial sector is already in recession and that could feed through to the consumer side as job cuts filter through."

Inflation fight is priority

ECB President Wim Duisenberg has made it clear the central bank, which controls interest rates for the 12-nations that form the euro zone, would not move on rates until inflation slows.

The euro zone's harmonised rate slowed to 3.0 percent in June from what everyone hopes was a peak of 3.4 percent in May. The ECB has been mandated by its political masters to keep inflation below 2 percent.

In the meantime, evidence is emerging that members of the euro zone are experiencing the ill effects of a U.S.-led economic slowdown.

French unemployment rose for the third consecutive month in June, pushing the headline jobless rate in the euro zone's second-largest economy up to 8.8 percent from an 18-year low of 8.7 percent previously.

On Friday, the INSEE institute said France's business confidence had fallen to its lowest level since April 1999.

German economy needs help

The Munich-based Ifo institute called on the ECB to cut rates as it forecast the German economy, Europe's largest, will grow only 1.2 percent this year compared with 2.2 percent previously.

In London, the Monetary Policy Committee of the Bank of England is weighing up signs of a "two-speed" economy. Industry is calling for a rate cut but consumers remain upbeat for now.     

The Nationwide Building Society said house price inflation was running at 10.9 percent in July and there was "little evidence of a diminished appetite for housing."

However, many economist said the UK manufacturing sector was already in recession and was likely to have a knock-on effect on the service sector, as job cuts feed through to negative consumer confidence.

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