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Bank of England cuts key rate; ECB likely to hold steady

LONDON, England (AP) — The Bank of England cut interest rates by a quarter of a percentage point to 5.25 percent on Thursday, its second cut in three months as it attempts to shore up confidence in Britain’s slowing economy.

The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued, the central bank said in its accompanying statement.

The trim in rates had been widely anticipated by analysts who had expected the central bank’s monetary policy committee to set aside conflicting concerns about accelerating inflation.

The bank said that higher energy and food prices could raise inflation, possibly quite sharply, in the coming months.

Inflation is currently running at 2.1 percent, already above the government’s 2 percent target, and a cut in rates to boost economic growth can also have the effect of increasing inflation.

Given this outlook for inflation, some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term, the bank said in its statement.

The committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target, it added.

The bank last cut rates, again by a quarter of a percentage point, in December. It stayed its hand last month as it awaited more data on the economy and possibly attempted to avoid sending a panic signal to the markets with a second cut in as many months.

Bank of England Governor Mervyn King has acknowledged that the bank is facing a difficult balancing act, with inflationary pressures from higher energy and food prices and a falling British pound weighed up against data showing slowing economic activity and turbulence on financial markets.

The U.S. Federal Reserve knocked 1.25 percent off the cost of borrowing during the second half of January in response to the threat of a recession in the United States.
Bank of England cuts key rate; ECB likely to hold steady – found here.

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February 7, 2008 - Posted by | Uncategorized

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