European Bank holds rates steady, Bank of England cuts

FRANKFURT, Germany — The European Central Bank held its benchmark interest rate unchanged at 4% Thursday, despite surging inflation and a stronger euro, as it considers how ripples from the U.S. subprime mortgage morass will affect the economy.

Earlier Thursday, the Bank of England, worried about a slowing economy, cut its key rate a quarter of a point to 5.5%.

Analysts expect the ECB, which oversees monetary policy the 13 countries that use the euro, to wait until the second quarter next year before it moves again, in no rush to follow rate cuts in the United States and Canada.

"Inflation has increased over the recent months and economic data are not so weak that the ECB is really concerned about the economy in Europe," said Commerzbank economist Matthias Rubisch. "If you look in the future, probably weaker economic data will lead to the ECB lowering rates."

European Central Bank President Jean-Claude Trichet said the ECB stands ready to counter upside inflation risks.

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"We will ensure that ... risks to price stability over the medium term do not materialize," he said.

Trichet said the fundamentals of the euro zone economy remain sound but financial market turbulence means continued uncertainty around the effect on the economy.

Higher prices for oil and food have led inflation higher in the euro zone — a bloc of 317 million people that accounts for more than 15% of the world's gross domestic product. Inflation surged to a 3% rate last month, according to a first estimate, highest since the euro was introduced into general circulation in 2002 and well above the ECB's guideline of just under 2%.

Nearly all analysts surveyed by Dow Jones Newswires believe the ECB will keep its rate unchanged until the second quarter next year, with some predicting gradual decreases to as low as 3.5% by the end of the year.

"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.

Most of the uncertainty in the markets traces back to the subprime mortgage debacle that originated in the United States and spread worldwide because the bad loans had been repackaged and sold to other banks. The worries about the U.S. housing market and U.S. interest rate cuts have hurt the dollar, which has been setting new lows against the euro and trading around 26-year lows against the pound.