European Central Banks Keep Rates on Hold

FRANKFURT — The European Central Bank and the Bank of England kept their main interest rates unchanged Thursday, as inflation concerns were overshadowed by renewed debt tensions in the euro area and the fear that government spending cuts could crimp economic growth.

The E.C.B. governing council, which included a representative from the new euro member Estonia for the first time, left its key interest rate at 1 percent. The bank has not adjusted interest rates since May 2009 and is not expected to until late this year, if then.

The Bank of England’s benchmark rate remained at a record low 0.5 percent, and the bank kept the size of its asset purchase plan unchanged at £200 billion, or about $311 billion.

Analysts say the Bank of England’s policy committee wants to gauge the impact on consumer confidence from the government’s £80 billion austerity program, which will start to bite this year and is to include thousands of public sector job cuts.

The central bank faces the challenge of avoiding steps that could hurt the economic recovery while keeping an eye on inflation, which has remained above its target for some months and is expected to climb further. Some economists acknowledged that the level of inflation is worrying but warned against raising interest rates too early, saying it would hurt a weak economic recovery.

“It’s going to be a bit difficult over the next few months to get a view on how consumers are responding to the government cuts,” Simon Hayes, chief U.K. economist at Barclays Capital, said. “If it wasn’t for rising inflation, the ideal thing to do is to sit on your hands in the coming months.”

In the euro area, Jean-Claude Trichet, the E.C.B. president, also faces a series of sometimes conflicting tasks. The E.C.B. is doing what it can to keep the financial crisis in check while also trying to nudge the banking system back to normal.

At a news conference scheduled to begin at 2:30 p.m. Frankfurt time, Mr. Trichet may call on European Union leaders to do more to bring the sovereign debt crisis under control. The E.C.B. has done much of the heavy lifting so far, for example buying Greek, Portuguese and Irish government bonds and flooding the banking system with unlimited cheap loans.

Some analysts also expect Mr. Trichet, who is beginning his final 10 months in office, to give more details about how the E.C.B. might cure sick banks of their addiction to low-interest central bank loans. The bank has indicated it wants to wind down the life support.

A relatively small number of banks depend on E.C.B. cash because they cannot borrow money at reasonable rates on open markets. That “is a clear indication of the absence of normal functioning of the system and the problem will need to be sufficiently addressed by the time of the March meeting” of the governing council, Nick Matthews, senior European economist at Royal Bank of Scotland, said in a note Wednesday.

The European Banking Authority, a new body that replaced the Committee of European Banking Supervisors on Jan. 1, announced Thursday that another round of E.U.-wide bank stress tests would take place in the first half of 2011, with results published mid-year.

Meanwhile, with inflation in the euro area creeping above the E.C.B.’s target of 2 percent, the members of the governing council must also remain mindful of their mandate to put price stability above all else. However, analysts do not expect the E.C.B. to move on rates until it is clear that inflation has become a chronic problem.

Mr. Trichet will also be asked about the E.C.B.’s purchases of European government bonds, which have helped hold down the risk premium on debt from Greece, Portugal and Ireland, but also put the bank in an increasingly difficult position. The E.C.B. had spent €74 billion, or $97 billion, buying government debt as of last week, and has likely become the biggest single investor in bonds from the three countries.

Estonia's adoption of the euro on Jan. 1 could slightly shift the center of gravity on the E.C.B. governing council. Andres Lipstok, head of the Estonian central bank and now a member of the council, is known as a hard-liner on inflation and fiscal responsibility and could side with the minority on the council who oppose the bond purchases. Axel Weber, president of the German Bundesbank, is the most vocal of the dissenters.

Britain’s economic growth likely slowed in the final quarter of last year, according to a business survey, and retail sales fell over the crucial Christmas holiday period. Heavy snowfall in December forced many shops to close and kept consumers at home.

Holiday sales at Debenhams, one of Britain’s largest department-store chains, fell by about £30 million because of the cold weather. Marks & Spencer, the country’s biggest clothing retailer, said earlier this month that it was cautious about its earnings outlook because of the government’s austerity measures coupled with rising inflation. While manufacturing industries showed strong growth recently because a weaker pound helped exports, Britain’s larger services sector struggled. Falling house prices and concern about unemployment dampened consumer confidence.

The Bank of England’s governor Mervyn King said previously that he expects inflation to rise further this year as a sales tax increase adds to higher oil and commodity prices, before falling again because of weaker economic growth. While many economists argued that the central bank is right to focus more on strengthening the recovery, there is a growing group who warn that the Bank of England risks losing its credibility if it does not act sooner rather than later to curb inflation.

Bank of England officials were split three ways in the past three months on whether to focus on growth or inflation by raising rates, keeping them unchanged or increasing the stimulus package.