European Bank Holds Fast As England Cuts Rate

FRANKFURT — Citing a worsening outlook in Britain, the Bank of England on Thursday cut its benchmark interest rate for the second time since financial turbulence began in August.

At the same time, the European Central Bank left its key rate on hold, convinced that problems with the tight credit market are hurting the economy of the euro zone.

The European bank on Thursday said that the economy of the 15-nation euro zone remained resilient despite eight months of volatile financial markets that is rippling through much of the United States and now appears to be creeping into Britain.

Like many countries, Britain experienced a housing boom in the last decade and depends heavily on the health of the financial services industry. With both housing and financing reeling, banks appear to be restricting credit to the rest of the economy for things like home purchases and plant equipment, the Bank of England said.

“Credit conditions have tightened and the availability of credit appears to be worsening,” it said in a statement.

The Bank of England sliced its main rate by a quarter percentage point, to 5 percent. The European bank maintained borrowing costs at 4 percent, and gave no sign it was preparing to ease, despite expectations that it will do so later this year or early next.

The euro, which has ridden steadily higher on the back of the central bank’s determination to keep interest rates steady, rose to a new all-time high of $1.5912 late in the morning in Europe before falling back. Higher rates increase the allure of euro-denominated assets.

A sharp pullback in lending to companies outside housing and banking has emerged as one of the most serious consequences of eight months of financial turmoil, which has shocked lenders into hoarding cash. In the United States, this development is well under way — and the Federal Reserve is searching for ways to reverse the trend — but the rest of the world has not felt the crunch to the same degree.

The president of the central bank, Jean-Claude Trichet, said Thursday that, by all measures, credit to companies in the euro zone appears healthy, though consumers have dialed back their borrowing. Mr. Trichet said that companies might be drawing on existing credit lines, or that they might be relying on bank lending because bond markets have turned so chaotic.

Whatever the reason, he signaled that talk of a serious credit crunch in Europe is so far just that.

“The turbulence started in August last year and we still see this continued dynamism,” in bank lending, Mr. Trichet said.

Still, he acknowledged the great uncertainties surrounding the economic outlook in Europe and elsewhere by saying that tension in financial markets “may last longer than initially expected.”

The Bank of England, by contrast, cut rates in an apparent response to sharp deterioration in the housing and credit businesses.

To some extent this mirrors what the Fed did over the last eight months — lower the benchmark rate to ease conditions for lending. But the Bank of England, wary of higher inflation, has given no sign it would move as aggressively as the Fed in coming months.

“This is a shift in their policy,” an economist at ING in London, Rob Carnell, said, “but a fairly minor shift.”

The cut disappointed some economists who had been hoping for more. But with inflation running close to its target of no higher than 2.5 percent, the bank said it had to balance the effects of the financial crisis against the threat of higher inflation.

The central bank, too, has eyed inflation in the euro area, which rose to an annual rate of 3.5 percent in March, far above its coal of close to, but below 2 percent. Repeated spikes in energy and food prices have delayed the bank’s prognosis that inflation will cool off, but the bank still expects that to happen later this year and early next.

Financial chaos persuaded many central bank watchers early on that the bank would quickly follow the Fed and ease rates. But that expectation has been dashed as the ECB has stuck to its primary mandate of keeping prices stable.

“The markets refused to believe in exactly where the ECB is,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “Now they do.”

Still, most economist have simply pushed their forecast for easing further out, rather than abandoning them altogether.

Janet Henry, chief Europe economist at HSBC in London, said that weakness in individual euro-zone economies like Spain and Ireland, combined with recessionary conditions in the United States, will slow Europe significantly later this year. That will allow inflation to fall, as overall demand declines.

“Things will be weak enough that we will see some rate reductions by early 2009,” Mr. Henry said. “I am as convinced as an economist can be.”

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