ECB, BoE to hold rates

December 3, 2001 Posted: 1340 GMT

LONDON (CNN) -- The European Central Bank and Bank of England are expected to keep interest rates on hold this week even as the economic climate deteriorates.

The Bank of England, which will announce its rate decision on Wednesday, has lowered its benchmark seven times this year, including a half-point cut at its November meeting. The rate now stands at 4 percent.

Still, economists do not see a rate cut from the BoE this time around, given the UK's relatively strong economic performance compared to other parts of Europe.

Gordon Brown, the UK's Chancellor of the Exchequer, predicts the economy will grow by 2.25 percent this year, in line with his earlier forecasts, and by 2.5 percent in 2002, down just slightly from previous estimates.

"The U.K economy is in a stronger position than many European economies, and perhaps now is the time to pause for a bit," Paul Donovan, economist at UBS Warburg, told CNN.

"I think there is a reasonable chance we will see another interest rate reduction before the cycle is over, but I don't think it is going to happen quite yet."

The ECB is under more pressure to cut rates, with concerns that the 12-nation euro zone could follow Japan and the United States into recession. The euro zone economy is expected to grow by 1.6 percent this year and 1.3 percent in 2002 – with the biggest  economy, Germany, forecast to grow by an annual rate of about 0.7 percent.

More evidence of a stagnating euro zone economy could come on Thursday, when third-quarter gross domestic product figures are expected to show growth of just 0.1 percent from the previous quarter.

The ECB surprised the markets in November by lowering its key rate by a bigger than anticipated half a percentage point - to 3.25 percent – its fourth cut this year.

But the central bank is expected to hold the line when it meets on Thursday – with its main focus remaining on inflation , which is running at an annual rate of around 2.2 percent, above the ECB's target level of 2 percent.

"For the foreseeable future, the level of interest rates seems to us to be appropriate," ECB Vice President Christian Noyer told reporters last month.

Still, economists say the ECB may have little choice but to cut again early next year if economic conditions in the euro zone continue to deteriorate.