FRANKFURT (AFP) — Both the European Central Bank and Bank of England left their main interest rates unchanged Thursday as policymakers tracked energy and food price spikes while keeping an eye on slowing growth.
The eurozone's benchmark lending rate was locked in at 4.0 percent, while the Bank of England left its "repo" rate -- at which it lends cash to commercial banks -- at 5.0 percent.
In the 15-nation eurozone, record 3.6 percent inflation in May loomed in the background as the European Central Bank's governing council remained on hold for the 12th straight month though clear signs were emerging of an economic slowdown.
The ECB also held its two other key rates -- the deposit rate and the marginal lending rate -- unchanged at 3.00 percent and 5.00 percent respectively.
In Britain too, consideration of inflation appeared to have outweighed concerns about weaker economic activity and a slumping housing market.
In continental Europe, the bottom line is that "inflation is way too high for ECB comfort," UBS economist Stephane Deo before the decision was announced.
The bank has an inflation target of just below 2.0 percent, a level it has had difficulty keeping inflation under.
Signs of a weaker eurozone economy were nonetheless also on the rise, with the NTC Research institute's purchasing manager's index slumping in May to its lowest level since July 2003.
Retail sales fell in April as well, official EU data showed, prompting Bank of America's senior European economist Holger Schmieding to note that "after a strong start into 2008, the eurozone is losing a lot of momentum."
Aurelio Maccario at UniCredit Markets said "the framework remains one of tight financial conditions" along with "high oil prices and a strong euro."
Oil prices spiked to record highs above 135 dollars last month and although they have since slipped back to around 123 dollars, they remain at historically high levels, driving fears of inflation.
The Organisation for Economic Cooperation and Development revised its eurozone inflation forecast higher Wednesday, pencilling in an average rate of 3.4 percent this year.
That would be the highest level since 1993 for its members.
For 2009, the OECD estimated inflation would fall to 2.4 percent.
Growth was revised down to 1.7 percent this year and to 1.4 percent in 2009, it said.
The ECB was to release its latest projections for inflation and growth later Thursday, with analysts expecting revisions along the same lines -- higher inflation and weaker growth.
"The forecast for 2009 is more relevant for the likely path of policy," noted economist Jennifer McKeown at Capital Economics.
In the United States, the US Federal Reserve has slashed its rates by 325 basis points to 2.0 percent since August to prevent the economy from falling into recession.
The Fed's latest signals suggest the rate cutting cycle will mark at the very least a pause and that the next move on the other side of the Atlantic could be higher.
That, and a widely noticed comment Tuesday by Fed chief Ben Bernanke that the weak dollar fuelled inflation pressures, has helped the greenback rally against the euro to levels around 1.54 dollars.
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