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No interest rate cut for ECB

Stephen Beard Feb 7, 2008


Doug Krizner: The recipe for curing an economic slowdown usually includes cutting interest rates. That’s what the Fed’s been doing. European central bankers met this morning to consider a similar move, but they decided against it.

Let’s bring our European correspondent, Stephan Beard. Stephen, so the European Central Bank did not cut interest rates. Now, isn’t Europe facing a slowdown?

Stephen Beard: Well, there are some signs of slowdown in Europe. But the European Central Bank is more concerned about inflation. Food and energy prices have been rising. Inflation has hit a 14-year high of 3.2 percent in the Eurozone, and that’s well above the European Central Bank’s target rate of 2 percent.

Krizner: So European Central Bankers leave interest rates unchanged on a day when the Bank of England decides to cut interest rates. Are the problems in the U.K. more similar to those that we’re facing in the U.S.?

Beard: Yes, they are more similar. But what the Bank of England is particularly concerned about is the currency, the British pound. I mean, the British pound has been very weak, and the concern is, on the part of the Bank of England, if they cut interest rates very sharply, that could send the pound into free-fall. And because the British economy is so incredibly exposed to trade, that could push up import prices very dramatically and increase inflation.

Krizner: What about the state of the housing market in the U.K. and the strength of the consumer?

Beard: Well, over recent months, prices have started coming down. In some areas of the country, they’re falling. And the big fear is that because the U.K. consumer is so heavily indebted, if house prices do fall sharply in the U.K., we could see a very, very severe recession.

Krizner: Our Stephen Beard in London. Many thanks.

Beard: OK, Doug.

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