The European Central Bank and the Bank of England left interest rates unchanged yesterday as signs of slowing economic growth left them little room for a tougher stance against rising inflation in the eurozone and the UK.
The ECB warned that the rate of price rises remained a real concern, and economists ex-pected the Bank of England also to leave a back door open for rate increases when it publishes the minutes from yesterday's meeting in late August.
But Jean-Claude Trichet, ECB president, spoke of a "materialisation of risks" to economic growth in the eurozone since the governing council last met in early July, a sign to economists that a rate rise had dropped off the agenda for now.
Analysts were sceptical about the likelihood of a rate cut coming soon after Mr Trichet stressed the ECB had only "one needle on [its] compass" - ensuring price stability - and "not two needles" (prices and growth) like the US Federal Reserve.
The ECB's policymaking committee seemed "alarmed by signs of economic downturn", said Julian Callow, an economist at Barclay's Capital. "Which is why it seems unlikely to raise the policy rate in the months ahead."
The central bank raised its main lending rate by a quarter point to a seven-year high of 4.25 per cent a month ago after soaring oil and food prices pushed eurozone inflation to a record 4.0 per cent in June. Price rises hit 4.1 per cent in July.
Price pressures have also been evident in the UK, where the Bank of England yesterday held its main lending rate at 5 per cent for the fourth month. Inflation hit 3.8 per cent in June and economists estimate it rose to 4.0 per cent last month.
But the ability of central banks to address inflation is being complicated by economic indicators showing growth across Europe rapidly slowing.
"The magnitude and breadth of the shift downward in the data, not just in the UK but also in the eurozone, is becoming alarming," said Malcom Barr at JPMorgan.
In his introductory statement following the ECB governing council's meeting in Frankfurt, Mr Trichet admitted that signs of slowing growth in mid-2008 had been only "in part . . . expected after the exceptionally strong growth in the first quarter".
Eurozone gross domestic product grew 0.7 per cent in January, February and March, and the central bank had long expected growth to weaken somewhat in succeeding quarters before picking up again in the last three months of 2008.
Maccario Aurelio, an economist at Unicredit in Milan, said that he expected a "sizeable downward revision" of 2009 growth from the ECB next month, a move that could bring the recent relative optimism of the ECB into line with other forecasters.
The International Monetary Fund forecasts eurozone growth of 1.2 per cent in 2009, while the ECB's June staff forecast still pegs growth at 1.5 per cent. The IMF on Wednesday cut its 2009 UK forecast to 1.1 per cent from 1.7 per cent.
Reports, Pages 2 and 7 Editorial Comment, Page 8 Tale of two policies, Page 9 www.ft.com/bigfreeze
