ECB, BoE leave interest rates unchanged

FRANKFURT, Germany (AP) - The European Central Bank has kept its benchmark interest rate unchanged at 4.25 percent even as the 15 countries that use the euro face continued high inflation and fears of slowing growth.

Thursday's decision mirrors similar moves by the Federal Reserve Bank and Bank of England this week. Markets will parse remarks by ECB President Jean-Claude Trichet later when he speaks to reporters about the decision.

The European economy is slowing as soaring fuel and food prices slam the brakes on growth. It's also suffering from tight borrowing conditions triggered by the global credit crisis and a slowdown in major trading partners, Britain and the United States.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

FRANKFURT, Germany (AP) - The Bank of England left its key interest rate unchanged at 5 percent and markets expected the European Central Bank to do the same when it meets later Thursday.

Both banks met to consider how best to steer their economies between the shoals of mounting inflation and slowing growth.

The Bank of England has left rates unchanged at 5 percent since April, when it reduced its benchmark figure by a quarter of a percentage point.

The ECB last month moved to cool inflation by hiking borrowing costs for the first time in a year to 4.25 percent for the 15 countries that use the euro - a bloc of 320 million people that accounts for more than 15 percent of the world's gross domestic product.

Higher interest rates can ward off inflation because demand for goods and services can steady or fall as a result of rising prices. On the other hand, higher rates can also quell growth as expensive money makes expansion borrowing less likely.

At the same time, higher interest rates can also underpin a currency, as investors park capital in investments that earn better interest.

"The Bank of England was in the unenviable position of trying to subdue heavy inflationary pressures and defend against slowing growth," said Nicholas Mosley, a currency analyst at Wachovia Bank.

Same story in continental Europe.

Alexander Koch, an economist at UniCredit said despite a recent correction in the price of oil, he still expected commodity pressures, higher producer prices, and no immediate relief on the inflation front. Furthermore, recent business climate indices in Europe and Germany - the euro zone's biggest economy - have pointed to similar expectations and slowing growth, he said.

"We expect a definite hold on rates (Thursday)," Koch said.

On Tuesday, the Federal Reserve left the benchmark rate in the U.S. unchanged at 2 percent, citing its own concerns about inflation while reporting that "economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports."

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AP Business Writer Jane Wardell reported from London.

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On the Net:

http://www.bankofengland.co.uk

http://www.ecb.int