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The Central Banks' Worrisome Rate Stance

Are European central bank actions, such as the Bank of England's quarter-point cut, too cautious to stave off economic woes?
Governor of the Bank of England Mervyn King speaks at the G7 finance ministers and central bank govenors meeting in the Queen Elizabeth II centre, February 4, 2005 in London.
Governor of the Bank of England Mervyn King speaks at the G7 finance ministers and central bank govenors meeting in the Queen Elizabeth II centre, February 4, 2005 in London. Getty

The Bank of England on Feb. 7 cut interest rates by a quarter of a percentage point for the second time in three months, to 5.25%, while the European Central Bank stood pat at 4%. Europe's central bankers are beginning to worry about a slowing economy because of the spreading effects of the credit crunch, but they are resisting going into emergency mode. That lack of urgency is disappointing financial markets and the businesses community, which fear the central bankers are engaged in an ivory tower exercise while U.S. Federal Reserve Chairman Ben Bernanke is chopping like a fiend.

British and European shares fell sharply on the day of the rate decisions, and the pound and the euro slumped against the dollar. ECB President Jean-Claude Trichet has toned down his hawkish rhetoric; in past months he has suggested that a rate hike might be the next move. Still, some economists such as Erik Nielsen of Goldman Sachs (GS) doubt that the ECB will cut rates at all this year.