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09/04/2008

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The European Central Bank and the Bank of England both opted on Thursday to keep their interest rates unchanged in the face of mounting inflation worries and slowing economies in Europe.

The decisions to leave the rates at 4.25 percent and 5 percent respectively had been expected by analysts. However, later comments by ECB President Jean-Claude Trichet on the outlook for the euro-zone economy led to share prices falling. He said that Europe's economy was experiencing an "episode of weak activity" which was in turn "weighing on consumer confidence."

The ECB lowered its 2008 economic forecast from 1.8 percent to 1.4 percent and its 2009 prediction from 1.5 percent to 1.2 percent. Higher prices for food and fuel are having an effect on consumer spending, hitting the main driver of growth.

"It's the language he's using at the moment," one trader told Reuters. "There's clearly not much growth this side of the pond … it looks as if the economy is not going to pick up."

The ECB in July moved to cool inflation by increasing the rate by 0.25 percent for the 15 countries that have the euro as their currency.

Thomas Mayer, chief economist with Deutsche Bank, told the Frankfurter Rundschau on Thursday that increasing the interest rate had been a mistake. "The ECB overestimated growth potential and underestimated financial crises like the oil price shock," he said, adding that he thought inflation had reached its peak and would fall under the ECB target of 2 percent by next year.

smd -- with wire reports