ECB and BoE leave rates unchanged

Both the European Central Bank and the Bank of England left interest rates unchanged yesterday.

In his introductory statement to the press conference, ECB president Jean-Claude Trichet said that "the outlook for price stability over the medium term is subject to upside risks". He sees "sustained growth during the second half of 2007" and "real GDP growing at around trend potential" in 2008, but "risks to the outlook for growth are judged to lie on the downside" partly because of the "ongoing reappraisal of risk in financial markets". Because of the "heightened level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn" but the ECB will act to ensure that "medium and long-term inflation expectations remain firmly anchored in line with price stability".

The BoE provided no details on its deliberations yesterday, but its decision was made in the wake of a report that UK house prices fell 0.6 percent in September according to an HBOS survey.

Meanwhile, in the US, notwithstanding data yesterday showing that factory orders fell 3.3 percent in August and initial claims for unemployment benefits increased by 16,000 to 317,000 last week, expectations for another rate cut by the Federal Reserve have actually declined, according to a Bloomberg report yesterday.

The chance of policy makers cutting their benchmark rate twice more this year, to 4.25 percent, fell to 48 percent today, the lowest since the Fed cut borrowing costs on Sept. 18, futures prices show. The December contracts last week reflected a 74 percent likelihood of two quarter-point reductions.

Sentiment shifted as St. Louis Fed Bank President William Poole, Philadelphia Fed chief Charles Plosser, Atlanta's Dennis Lockhart and Richard Fisher of Dallas in the past 10 days highlighted signs the turmoil in credit markets is easing. Economic and financial reports have complemented their remarks, as commercial paper halted a seven-week slump and surveys showed continued expansion of manufacturing and services industries.