ECB, BoE keep rates unchanged

The Bank of England has kept interest rates the same since November

LONDON, England (CNN) -- The European Central Bank on Thursday joined the Bank of England in keeping interest rates on hold as signs of economic recovery remain weak.

The ECB's key lending rate remains at 3.25 percent, after being slashed four times in 2001 in an effort to reverse the economic downturn. Earlier on Thursday, the BoE decided to keep its main rate at 4 percent, the lowest level in 37 years, after cutting it seven times last year.

Both rate decisions had been widely expected, as was the Swedish central bank's announcement on Thursday that it was keeping its key rate on hold at 4.25 percent.

As for the ECB, economists say there is little need for it raise borrowing costs yet, given the relatively moderate pace of recovery in the 12-nation eurozone and the single currency's 16-month high against the U.S. dollar, which has helped keep inflation in check by making imported goods less expensive.

A recent decline in the price of oil has also helped lessen the threat of inflation.

"We would probably have been pricing in an interest rate rise already this week, if we had oil prices and the euro now at levels from six or eight weeks ago," Holger Fahrinkrug, an economist at UBS Warburg in Frankfurt, told Reuters.

The European Central Bank cut rates four times last year

Business and consumer confidence has been improving in the eurozone, along with the economy.

Germany, the eurozone's largest economy, saw its gross domestic product grow 0.2 percent in the first quarter, after shrinking 0.3 percent at the end of 2001.

France, the eurozone's second largest economy, registered GDP growth of 0.4 percent in the first three months of the year, after a decline of 0.4 percent in the fourth quarter of 2001. No.3 Italy advanced 0.2 percent in the first quarter of this year.

Despite this growth, eurozone inflation still fell to the ECB's target of 2 percent in May, for the first time this year.

But economists believe the ECB still has reasons for concern. Unemployment is still running higher than desired by most governments and inflation remains a looming concern.

"The market seems to think that because May inflation will hit 2 percent, all is hunky dory. It isn't," Bear Stearns said in a note to investors. "Eurozone inflation has been above the 2 percent target for the last two years and will quickly rebound to 3 percent by year-end."

Meanwhile, the decision by the BoE Monetary Policy Committee to hold rates was greeted favourably by business groups.

"The MPC has taken the right course of action as recent manufacturing figures confirm that industry is clearly not out of the woods yet," Sally Low, head of policy at the British Chambers of Commerce, told Reuters.

The BoE is now expected to hold off raising rates until economic conditions improve in the UK. Many predict borrowing costs could starts rising in July or August at the earliest.

The UK economy barely grew in the first quarter of this year, edging up by only 0.1 percent between January to March from a year earlier -- the slowest annual growth since the end of 1992.

At the same time, house prices have been soaring and retail sales are continuing to rise, though at a slower pace in May than in previous months.