Trichet piles on pressure as rates are held

European Central Bank President Jean-Claude Trichet unnerved stock markets yesterday by highlighting the nasty combination of a "trough" in growth in the 15-nation eurozone and upside risks on the inflation front, as the Bank of England held UK base rates at 5%.

Wall Street even felt the chill as the comments from Trichet, made after the ECB held benchmark interest rates in the single currency bloc at 4.25% yesterday, raised fears over weakening global growth without any accompanying sign of swift relief in the form of a cut in eurozone interest rates.

The UK's FTSE-100 index of leading shares finished 137.6 points, or 2.5%, lower at 5362.1. Paris's CAC-40 index ended 3.2% weaker, and Germany's Xetra Dax was off 2.9%.

New York's Dow Jones Industrial Average finished 344.65 points or 2.99% weaker at 11,188.23, with seasonally-adjusted data revealing a 15,000 jump in the latest week's new US jobless claims to 444,000 and poor figures from some American retailers adding to the gloom created by Trichet.

The ECB yesterday cut its respective forecasts of 2008 and 2009 growth in the eurozone to 1.4% and 1.2%, in terms of the mid-points of its ranges, from 1.8% and 1.5% only three months ago.

Trichet, referring to "weakening GDP (gross domestic product) growth in mid-2008", said: "As regards the profile of growth ... the second and third quarters are a trough in the profile ... We are in a trough, that's absolutely clear, and progressively we will see a gradual recovery."

Appearing keen to play down any expectations of a swift rate cut, he added: "We have upside risks to price stability, we are clear on that. We have only one needle in our compass, which is delivering price stability."

Even as the Bank of England's Monetary Policy Committee was standing pat in London for a fifth consecutive month, business leaders and economists were mulling the likely timing of a cut in UK base rates.

The MPC held base rates several hours after mortgage lender Halifax's latest monthly survey showed the average UK house price dropped by a seasonally-adjusted 1.8% in August to leave it 12.7% lower than in the same month last year. This was the sharpest year-on-year drop since the survey began in 1983 - exceeding any fall seen during the early-1990s housing market downturn.

Even on Halifax's preferred year-on-year measure, comparing the three months to August with the same period of 2007, the average house price dropped 10.9%.

The pound hit a fresh record low against the euro yesterday, amid the latest signs of weakness in the UK economy. Sterling meanwhile traded at its lowest level for nearly 12 years on its trade-weighted index, against a basket of currencies, for a ninth straight session.

The euro rose as high as 81.86p against the pound during trading.

Sterling, meanwhile, hit fresh two-year lows against the dollar. It traded as low as $1.7628 - its weakest level since April 2006.

The dollar, meanwhile, hit its highest level against the euro this year.

Stuart Porteous, head of group economics at Royal Bank of Scotland, said of the MPC's no-change call yesterday: "All good things come to an end, and, unfortunately, UK growth is no exception. After the economy broke its astonishing winning streak of 15 years of continuous growth this summer, the next UK rate move will almost certainly be down. But not just yet. The MPC looks set to keep rates on hold until it is unambiguously clear that inflation has passed its peak - and that probably won't happen until early in 2009."

However, about half of UK economists expect a cut in base rates by the year-end.

Liz Cameron, chief executive of Scottish Chambers of Commerce, said: "With inflation nearing its expected peak this autumn, the decision to keep interest rates on hold this month comes as no surprise. However, if as expected we begin to see falling inflation again towards the end of the year, then it is vital that the Bank of England acts in a timely fashion to reduce interest rates further in order to support Scottish businesses."

She added: "There is no doubt that the economic slowdown is beginning to impact on Scottish firms and an interest rate cut before the end of the year would act as a vital boost to business confidence north of the border."

Andrew Goodwin, senior economic adviser to accountancy firm Ernst & Young's ITEM Club think-tank, said: "The Bank has a delicate balancing act to perform. With the economy heading towards recession there is a risk that inflation might undershoot the target over the two-year horizon. With oil prices falling, a clear sign that domestic price pressures are easing would allow a rate cut. This could happen before year-end."

Iain Ferguson of the Confederation of British Industry Scotland, said: "Worries about inflation have clearly underpinned this decision to keep rates on hold. If, as expected, inflation dips over the autumn then the chances of rate cuts increase, which should provide welcome relief for those businesses servicing debts and those looking to borrow to invest."