England cuts rates, European Central Bank holds steady

FRANKFURT -- The European Central Bank ended its campaign of rate cuts Thursday, leaving its benchmark refinancing rate at 2%, while the Bank of England cut the official Bank Rate paid on commercial bank reserves by a half-point to a record low 1% as it combats a deepening recession.

The decision by both banks was widely expected but marked different approaches to the global economic woes that have sent markets plunging and led to thousands of layoffs, reduced worker hours and factory shutdowns.

The ECB, central bank for the 16 countries that use the euro with their 330 million residents and gross domestic product of more than euro4 trillion ($5.6 trillion), has been more cautious than the Bank of England in cutting rates, which can stimulate growth by lowering borrowing costs for businesses and consumers.

But the rate-cut instrument relied on by central bankers has been blunted as banks struggling with losses from the financial crisis remain reluctant to lend or fully pass on rate cuts.

The Central Bank's caution has led to criticism it is moving too slowly, raising the possibility that the recession in the euro zone could be worse than it would have otherwise been.

"The ECB is clearly behind the curve, as it was in July 2008, when it raised interest rates by a quarter of a percent," said Richard Snook, senior economist at the Centre for Economic and Business Research.

"Global policy rates at zero, and coordinated quantitative easing across all major economies is the best remedy for an unprecedented global crisis," he said.

In London, the Bank of England is trying to get the ailing British economy back on the rails. Official figures recently confirmed that Britain is experiencing its worst recession since the early 1980s. The economy saw output plummet a steep 1.5% in the fourth quarter 2008.

In its statement accompanying the decision, the Bank of England said business surveys indicate a "similar rate of decline" in early 2009 as credit conditions continue to tighten for households and companies.