ECB, BoE keep rates on hold

March 7, 2002 Posted: 1449 GMT

LONDON (CNN) -- The European Central Bank and the Bank of England left interest rates unchanged on Thursday, as widely expected, due to signs of a weak economic recovery.

The European Central Bank, which cut its key lending rate four times in 2001, kept its rate unchanged at 3.25 percent. The BoE held its benchmark rate at 4 percent -- its lowest level in 37 years -- after reducing it seven times last year.

"This [decision] belies the fact that there is most probably a heated debate going on in both banks about policy right now," said investment bank Bear Stearns.

The banks have been expecting the global economic slowdown to begin easing, allowing them to gradually raise rates again to ensure a rebound does not come too far, too quickly.

But now, economic evidence is pointing to a much slower recovery than many had expected.

"They are really waiting to see how the economy will perform this year before raising rates," John Calverley, and economist at American Express Bank, told CNN.

The United States, Japan and Germany -- Europe's one-time economic powerhouse -- are still officially in recession. Other countries -- such as Britain and France -- have seen their economies grind to a halt, as manufacturing output falls and unemployment rises.

In the UK, gross domestic product stalled in the fourth quarter of 2001, making it the worst performance since the second quarter of 1992 when Britain was in recession.

Germany slipped into recession in the second half of 2001, shrinking 0.3 percent in the fourth quarter after contracting 0.2 percent in the third. And in France, GDP slipped to minus 0.1 percent in the fourth quarter from a meagre growth rate of 0.5 percent in the previous three months.

Before the most recent economic data, many economists had been forecasting UK rates to rise to 5 percent in the second quarter. But most have toned down their estimates because of the sluggishness of  the global recovery.

In fact, many are expecting only a marginal increase -- or none at all – from the ECB and the BoE this year.

"In the UK, policy may be on hold, but it is still up in the air whether the next move will be a hike or a cut," Bear Stearns said.