Central banks leave rates on hold

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

LONDON, England (CNN) -- The European Central Bank and the Bank of England left interest rates unchanged on Thursday as financial markets slump, raising concerns that a global economic recovery will be sluggish.

The European Central Bank has kept its key rate at 3.25 percent, after trimming rates four times in 2001, and the BoE left borrowing costs at 4 percent, the lowest level in 37 years.

Both the ECB and the BoE have kept rates on hold since November, after joining other major central banks in a concerted effort to reverse the global economic slowdown.

But recent stock market routs have left many market watchers to believe interest rates should stay on hold. Falling stocks markets could damage the wealth of investors and feed to falling consumer confidence.

London's FTSE 100 benchmark index slumped to a 5 year low on Thursday on concerns about growth and accounting practice, in the wake of Enron and WorldCom troubles. The pan-European FTSE 300 index, a broader index of the region's largest stocks, has fallen about 20 percent this year.

"The equity market collapse we have seen is going to affect consumer spending, and consumer sentiment. But also it raises fears about the financial system ... and you would expect a Central banks to respond to those signs of potential financial distress," John Sheppard, economist at DKW, told CNN.

The European Central Bank cut rates four times last year

ECB President Wim Duisenberg signalled on Tuesday the time may not yet be ripe for a rate rise. The bank is still weighing inflationary pressures against the rise in the euro and the strength of the recovery.

The ECB, along with the Bank of England, has been monitoring the economy and waiting for the appropriate time to begin raising rates to ensure the recovery is gradual and does not result in higher inflation.

Inflation has fallen below the ECB's target ceiling of two percent for the first time in two and a half years, while the euro -- which has lagged behind other major currencies since its inception in January 1999 -- is now approaching parity with the U.S. dollar.

A stronger euro makes imports cheaper to buy, which in turn eases inflationary pressure although it may also crimp growth by making exporters less competitive.

But subdued overall inflation, combined with stock market weakness and uncertainty about the strength of economic recovery has led the MPC to err on the side of caution.

"The stronger euro has done the walking and talking for ECB tightening for now and a delay until October looks likely," economist at Bear Stearns wrote in a note to investors.

Business and consumer sentiment, which had been showing signs of strengthening in recent months, slipped more than expected in June. Individually, Europe's largest economies -- Germany and France -- have reported worsening consumer and business morale as well.

Both of those countries have seen employment rise along with other eurozone nations, and manufacturing -- the backbone of Europe's economy -- has been slow to recover, making many companies wary of hiring new workers.

Back in Britain, some analysts expect the Bank of England to raise rates in November as the housing market continues to boom.

"I think the point on the housing market in the UK is that it is potentially destabilizing. If you let it go to high, it has further to fall and that could hurt general consumer demand and I think that is really what the Bank of England is worried about," Brian Hilliard at SG Securities told CNN.

Britain's red-hot property market recorded its highest annual price growth for 13 years in June, surging 19.3 percent year-on-year, according to the Halifax bank, a unit of HBOS.

Bank of England Governor Sir Edward George warned this week that strong consumer spending, which is being fed in large part by the "feelgood factor'' of surging house prices, must slow down soon or interest rates will have to rise.