U.S. economic woes spook European markets

FRANKFURT, Germany -- The European Central Bank and the Bank of England face similar paths Thursday as rising inflation, a falling dollar and concerns about the health of the U.S. economy weigh on key interest rate decisions.

Analysts are all but unanimous that the ECB, which oversees the 13 countries that use the euro, will leave its benchmark rate unchanged at 4 percent until it can get a clearer view of how ripples from the U.S. subprime mortgage morass, the euro's record high and surging inflation will effect the economy.

In fact, most analysts believe the bank won't make any moves until early next year for the euro-zone, a bloc of 317 million people that accounts for more than 15 percent of the world's gross domestic product.

In Britain, the Bank of England faces a similar quandary and is also likely to remain in neutral, though some have suggested the possibility of a surprise rate cut, much like that of Canada, which on Tuesday cited the weak American dollar and uncertain economic prospects as the reason for lowering its own rate to 4.25 percent.

What seemed like a sure thing was muddled by new data showing British consumer confidence plunging this week. That, noted Howard Archer, chief U.K. and European economist at Global Insight, has brought Thursday's meeting into new focus.

"We had believed that ongoing concerns about significant inflationary pressures and considerable uncertainty as to what extent the U.K. economy is currently slowing would result in a majority of (Monetary Policy Committee) members favoring unchanged interest rates on Thursday," he said.

But "we now believe that a recent stream of markedly softer data and survey evidence relating to the services sector, consumer confidence and the housing market has given a decisive advantage to the rate cut case" of up to half a point from its current 5.75 percent.

If Britain does cut its benchmark rate, it will follow Canada and the U.S., where the Federal Reserve Bank has cut rates at each of its last two meetings to try to spur the economy and its key rate now stands at 4.5 percent.

The ECB is expected to hold steady, for now, keeping its rate hike campaign that started in December 2005 on pause since its last increase in June.

Amid the market instability, emergency cash infusions and the general malaise that has plagued global markets since the summer, all 50 analysts and financial institutions polled by Dow Jones Newswires thought no rate move would come from the ECB until the picture is clearer.

"Money market rates are rising again, but with the ECB Council unconvinced about either a dramatic slowing of growth prospects or an impairment of credit supply, it won't feel compelled to alter its policy course," Deutsche Bank analysts wrote in a note to investors.

Nearly all the analysts surveyed think the ECB will keep its rate unchanged until the second quarter of next year, with some predicting gradual decreases to as low as 3.5 percent by the end of the year -- reversing the majority of the increases since the bank began raising rates in December 2005.

Most of the uncertainty traces back to the subprime mortgage debacle that originated in the United States and snaked worldwide because the bad loans had been repackaged and sold on to other banks, including many in the euro zone.

That unnerved the ECB and the Bank of England, both of which have pointed to the aftershocks as agitating their economies. The worries about the U.S. housing market and the rate cuts have hurt the dollar, which has been setting new lows against the euro and trading around 26-year lows against the pound.

One of the biggest thorns for the central banks has been inflation. Consumer prices in Britain rose 2.1 percent in October as rising petrol prices pushed inflation above the government's target for the first time since June.

Inflation in the euro zone has spiked in recent months, led by prices for oil and food. The euro area saw inflation surge to 3 percent last month, according to a first estimate, its highest point since the currency was introduced into general circulation in 2002. That figure is well above the ECB's guideline of just under 2 percent.

Copyright 2007 The Associated Press.

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