The European Central Bank and the Bank of England left their key interest rates unchanged Thursday as inflation concerns continue to preoccupy bank officials. The ECB kept its main refinancing rate at 4 percent, where it has been since June 2007, as the bank has stressed its strict mandate to fight inflation. The Bank of England, which has cut rates twice so far this year, didn't touch its main interest rate of 5 percent in a decision earlier Thursday. Cutting rates can stimulate the economy, but can also make inflation worse - and both banks are seeing price levels rise faster than they would like. The European Union's statistical agency, Eurostat, has estimated that inflation in the 15-nation euro zone hit 3.6 percent in March and May - far above the ECB's stated goal for inflation of below, but close to 2 percent over the medium term. In Britain, the Bank of England's quarterly inflation report in May warned that inflation could spike as high as 3.7 percent this year. Economists expect slowing growth to prompt the central bank into further cuts eventually to kick-start the economy, but the inflation outlook has clouded the timing of further trims. Some predict the bank will lower rates in August, while others suggest that may be too early. Some think the ECB will eventually do the same. Howard Archer, an economist at Global Insight in London said he believed weaker euro-zone growth would help slacken inflation and eventually let the ECB cut rates. However, he added, “it is looking ever more likely that this will not happen until 2009.” In Europe, “elevated inflation levels and risks will keep the ECB talking tough on inflation at Thursday's policy meeting and for some time to come,” Archer said. The ECB has stressed its strict mandate to fight inflation in resisting pressure from politicians and others over recent months to cut rates, as the US Federal Reserve has recently in an effort to dispel gathering economic gloom. The US Federal Reserve has lowered its key rate to 2 percent from 4.75 percent since last September. Still, Fed Chairman Ben Bernanke made his strongest expression of concern yet over inflation and the dollar's slide, indicating Tuesday and again Wednesday that the Fed's rate cutting spree is probably over. “Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,” Bernanke said during a talk at Harvard University Wednesday. “We will need to monitor that situation closely.” The dollar has been dragged down over recent months by the Fed's aggressive rate cuts as it tries to boost the faltering economy. Lower interest rates can often weigh on a country's currency as investors transfer funds to higher-yielding assets, like the euro.
