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BOE and ECB leave rates on hold
LONDON, England (CNN) -- The Bank of England and the European Central Bank left interest rates on hold Thursday as policy makers await clearer signs that recent rate cuts are enough to kick start growth. The ECB, which sets interest rates for the 12-nation eurozone, decided to leave the cost of borrowing at 2.5 percent. And the BoE kept its key interest rate at 3.75 percent, its lowest since 1955. Growth in the $7 trillion eurozone economy has been slow, but the single currency's 12 percent rise against the dollar to four-year highs should dampen inflationary pressures -- although companies will find it more difficult to sell products abroad as they become more expensive. Many economists are betting on an interest rate cut in the coming months, possibly as early as June, as there is no evidence of a post-Iraq-war boom. "The surging euro is a headache for the ECB because it represents a proxy monetary squeeze on the eurozone economy," said David Brown, economist at Bear Stearns. "With eurozone core inflation running at 1.8 percent and heading lower, and while recovery fundamentals remain so lackluster, it underlines that the ECB's current monetary stance is too restrictive." After the ECB decision, the euro extended gains against the dollar to $1.142, near recent four-year highs, while stock markets accelerated their losses. (Full story) But with the possibility that a strengthening euro could hurt exports, many economist expect the ECB to trim rates next month. "The eurozone stock market could use some help from lower ECB rates given some more disastrous German data yesterday on unemployment and orders," said Brown. German industrial orders plunged 3.9 percent in March and the jobless numbers rose for the 13th straight month. On Tuesday, the U.S. Federal Reserve left interest rates unchanged at its lowest level in four decades at 1.25 percent but signaled it was ready to cut the cost of borrowing as growth weakens. But the ECB sees faster economic growth for the rest of 2003, even though ECB President Wim Duisenberg in April scaled down forecasts to no more than one percent this year. As for the BoE, economists said the fall in sterling and a surge in stock prices, which saw the FTSE 100 top 4,000 recently, could allow the BoE time to sit on its hands. A spate of fairly upbeat surveys on Britain's service and manufacturing sectors have pointed to slight improvements since the fall of Baghdad in early April. And the pound's eight percent decline against the euro could help manufacturers. The British economy is outstripping growth in continental Europe but at 0.2 percent in the first quarter, most analysts say growth is only plodding along.
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