The Bank of England continued a campaign of aggressive rate cuts Thursday, while the European Central Bank left its key lending rate unchanged at 2%.
The Bank of England cut its key lending rate by half a percentage point to a record low 1% as policy makers battle a potentially deep and lengthy recession.
The ECB's decision to stand pat, like the Bank of England cut, was widely anticipated.
Traders will closely watch ECB President Jean-Claude Trichet's monthly news conference at 8:30 a.m. Eastern for clues to the central bank's next move.
The pound strengthened on the BOE's decision, and remained 1.1% higher versus the U.S. dollar at $1.4588. London-listed shares were lower. See London Markets story. See currencies.
The euro trimmed small gains versus the dollar after the decision to trade recently at $1.2843, a gain of 0.1%.
Since October, the Bank of England has dropped the benchmark, known formally as bank rate, by four full percentage points. Last month's half-point cut to 1.5% took the benchmark below the 2% level for the first time since the bank's founding in 1694.
In a statement, the rate-setting Monetary Policy Committee noted that "credit conditions faced by companies and households have tightened further" and that "the underlying picture for consumer spending appears weak."
Meanwhile, businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding jobs, the MPC noted.
Although cuts in official interest rates haven't been fully passed on to borrowers, past reductions in the bank rate will eventually have a "significant impact," the statement said.
"Together with the recent easing in fiscal policy, the substantial fall in sterling and past falls in commodity prices, that would provide a considerable stimulus to activity as the year progressed," the committee said.
Still, the MPC said there remained a "substantial risk" of undershooting the bank's 2% annual inflation target, warranting Thursday's cut in the bank rate to 1%.
'Historically strong' U.K. contraction
The CIPS/Markit monthly survey of purchasing managers released Wednesday indicated the pace of the economic contraction in Britain's dominant services sector eased in January. The pace of the decline in activity, however, remained "historically strong," Markit Economics noted.
And other data released since the January MPC meeting point to a deep and lengthy recession, economists noted.
Fourth-quarter gross domestic product shrank by 1.5%, unemployment is on the rise and consumer confidence continues to tumble. See full story.
And a speech by Bank of England Governor Mervyn King last month painted a bleak picture of the economy over the first half of the year.
King also warned that inflation could still fall well below the central bank's 2% annual target and laid the groundwork for "extraordinary measures" that could allow the Bank of England to follow the U.S. Federal Reserve on the path to quantitative easing, if needed. See full story.
Frozen in Frankfurt
ECB President Jean-Claude Trichet made it relatively clear to reporters after the council's January meeting that the February meeting held little prospect for another cut.
"The next important meeting will be in March," Trichet said, and reiterated the point in recent weeks.
"The ECB clearly wishes to drag its heels over further aggressive easing," said Soren Dijohn, senior analyst at Danske Bank in Copenhagen.
That's likely to be reflected in a neutral statement by Trichet following the meeting, Dijohn said, though the key rate is likely to fall to 1.5% in the March meeting.
"The economy simply looks so weak the ECB cannot avoid going below 2%," Dijohn said. "Euroland is already firmly in recession, and even though we have had a small rebound in business sentiment, indicators still point to the deepest recession for decades."
Unemployment is expected to rise over 2009, while inflation pressures continue to fade.
"With surveys showing a sharp decline in hiring intentions, further sharp increases in unemployment lie ahead, adding to the downward pressure on wages growth and inflation," said Jonathan Loynes, chief European economist at Capital Economics.
