Interest rates remains at five percent

The European Central Bank and the Bank of England both left their benchmark interest rates unchanged Thursday as they ponder how best to steer their economies between the shoals of mounting inflation and slowing growth.

Speaking to reporters after the ECB lefts it interest rate unchanged at 4.25 percent, bank president Jean-Claude Trichet warned that inflation – which reached 4.1 percent in July – would continue to remain well above its preferred level of about 2 percent for a while yet.

"Looking ahead, based on the current prices for futures commodities, the ... annual inflation rate is likely to remain well above a level consisent" with the bank's goal "for quite some time," he said.

Trichet also lamented the collapse of talks aimed at reaching a new global trade pact late last month, calling it "a major setback."
While the trade talks launched in the Qatari capital of Doha in 2001 had struggled before, last month's failure was perhaps the most devastating. Faced with global unrest from rising food prices, credit problems from shaky financial markets and the threat of economic downturn, negotiators hoped that a deal to open farm and industrial markets would go some way toward alleviating these problems.

Turning back to the euro zone – a bloc of 320 million people that accounts for more than 15 percent of the world's gross domestic product – Trichet said that the bank would continue to "monitor very closely all developments" in the coming months, a likely signal that no immediate rate increase is in the offing.

The ECB last month moved to cool inflation by hiking borrowing costs for the first time in a year to 4.25 percent.

The Bank of England has left rates unchanged since April, when it reduced its benchmark figure by a quarter of a percentage point.
Higher interest rates can ward off inflation because demand for goods and services can steady or fall as a result of money becoming more expensive. On the other hand, higher rates can also quell growth as expensive money makes it harder for businesses to borrow money and expand.

At the same time, higher interest rates can also underpin a currency, as investors park capital in investments that earn better interest.
The decisions by both banks confirmed expectations by economists that hamstrung policymakers in Britain and the euro zone have decided that for now the best of their limited options is to do nothing.

"It should not have come as surprise to anyone that, on balance, the (Bank of England) felt it could do nothing but sit tight this month, a situation that is likely to prevail for a few more months," said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.

The story is similar in continental Europe, too.

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