ECB keeps rates the same, surprising some economists

The Bank of England Thursday cut its benchmark interest rate by one-quarter percentage point to 5.50%, saying higher credit costs are likely to hurt economic growth.

Also, next week the U.S. Federal Reserve meets and analysts expect the Fed to cut the discount rate by one-quarter point to 4.75%, and the main federal funds rate by a quarter-point to 4.25%.

The currency markets took the ECB's decision in-stride Thursday morning, with the euro virtually unchanged against the dollar at $1.4625 and the pound essentially unchanged against the dollar at $2.0275

ECB comments

Some analysts had expected the ECB to raise rates by one-quarter percentage point. In his post-meeting comments, ECB President Jean-Claude Trichet said policy makers stand ready to counter "strong upward pressure on inflation," Bloomberg News reported.

"It would not surprise me to see the ECB come back with a rate cut at its next meeting. Three simultaneous cuts by the three largest central banks may have been just a bit too big of a signal for the markets," Resnick said. "Of the three central banks, the one least likely to cut was the ECB, but most analysts are still looking for a cut from them in early 2008. Their GDP growth in 2008 is expected to be OK at about 2.3%, but their economy clearly is not overheating."

Fiscal package

Resnick added that currency traders now sense that the Bush Administration's proposed five-year interest rate freeze for selected subprime loans may also have been a factor in the ECB's decision.

"The subprime loan bailout package, if it comes close to the preliminary package that's been outlined, represents hundreds of billions of dollars in stimulus, and needless to say it would have moved the markets. I think what they're trying to do is space-out these monetary and fiscal policy announcements so the markets aren't spooked," Resnick said. "And these days, it doesn't take too much to spook the currency or equity markets."