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BoE, ECB hold on rates
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February 7, 2002: 7:42 a.m. ET
Central banks keep key rates unchanged, amid high consumer demand, industry slump
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LONDON (CNN) - The European Central Bank and the Bank of England kept interest rates unchanged on Thursday as the economic outlook remains cloudy.
The ECB left its key rate at 3.25 percent, after cutting it four times in 2001, while the BoE held its benchmark at 4 percent, its lowest level in 37 years, after reducing the rate seven times last year.
Both central banks are facing increased consumer spending and faltering manufacturing sectors, which means they are unlikely to resume the rate-cutting spree that dominated monetary policy in 2001.
Still, many economists believe the BoE has room to cut rates further, especially with inflation running well below the bank's target of 2.5 percent.
But those rate cuts have done little to pull the manufacturing sector out of recession, and have over stimulated house buying and retail spending. In fact, the BoE has hinted it may actually increase rates soon if consumer spending continues to grow and push up inflation.
"The next move now I think is to the upside," Henk Potts, an analyst at Barclays Stockbrokers, told CNN, adding that rate hikes should come by the end of the year.
The British economy, the world's fourth biggest, grew at the slowest pace in almost three years in the fourth quarter of 2001, with GDP for the entire year growing at 2.4 percent compared with 3 percent in 2000.
The slowdown has been blamed largely on a sharp contraction in industrial output, prompting many industry officials to call for more rate cuts to stimulate production.
Investment bank Bear Stearns said the economic tide appears to be turning against the UK.
"The odds seems to be rising that the next move in UK rates will be up, not down," it said in a note to investors, "While we concede that our call for one more...rate cut is looking more lonely, the chances that the Bank of England will rush to the rate hike mark this year still look remote."
The ECB's decision to keep rates on hold was also widely expected, although many believe the central bank's rate-cutting days may not be over just yet.
Bear Stearns said the ECB still has room to cut by half a percent or more over the next few months.
Thursday's rate decision was made in the Dutch city of Maastricht to mark the 10th anniversary of the treaty that led to the creation of Europe's single currency.
In January, 300 million eurozone citizens began using the single currency. The euro is now legal tender in Austria, Belgium, Finland, France, Germany, Greece, Republic of Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
The introduction of the euro has led to some price mark-ups by retailers and also has had a novelty effect on consumers, many of whom went on buying sprees as they tested out the new notes and coins.
However, this has added new inflationary pressure - the ECB's key baromoter of monetary policy.
Preliminary data show eurozone inflation rose to 2.5 percent in January from 2.1 percent in December, above the central bank's long-set target limit of 2 percent. Any further rate cuts could be expected to aggravate the situation. 
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