Europe starts moving toward interest rate cuts

British consumers and retailers welcomed a cut in interest rates Thursday with relief and pleas for more, while the euro zone’s central bank held rates steady but left the door open for a cut this year.

The prospect for rate cuts in the 15-nation euro zone and for further reductions in Britain pushed the dollar up sharply.

The euro sank to $1.4459 in late New York trading from $1.4628 late Wednesday. The pound dropped to $1.9405 from $1.9601.

Declines in an economy’s interest rates tend to depress the value of its currency.

Retail and business groups across Europe and Britain have been calling for rate cuts in response to fears of a U.S. recession as well as slowing growth elsewhere and turbulent financial markets.

The Bank of England obliged for the second time in three months, lowering a key interest rate by a quarter of a percentage point to 5.25%. Several mortgage lenders quickly announced that they would pass on the full reduction to borrowers.

But the European Central Bank -- which sets monetary policy for the euro zone, a bloc with more than 318 million people -- held its benchmark rate steady at 4% but did offer a glimmer of hope for rate cuts this year.

In Britain, Stephen Robertson, director-general of the British Retail Consortium, said more rate reductions were required to prevent a greater economic slump.

“What’s needed is a series of considered, preemptive cuts, to avoid the need for Fed-style, last-minute rate-slashing later on,” Robertson said. “Let’s be clear: The sooner the bank cuts again, the better for everyone.”

In the U.S., the Federal Reserve has cut rates five times since September in an effort to spur the economy and encourage reluctant banks to issue credit to each other, companies or consumers.

In mainland Europe, the European Trade Union Confederation has been vocal in advocating lower rates to keep the economy from stalling.

Although the euro zone is not immune to any global slowdown linked to the sub-prime credit crisis in the United States, the European Central Bank has been more concerned with high inflation. A cut in rates to boost growth could also spur inflation as consumer demand increases.

The central bank’s president, Jean-Claude Trichet, said Thursday’s decision to hold rates steady was unanimous, a change from January when a hike was also considered, and noted that risks to growth in the euro zone were on the rise. “As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy,” he said.

Trichet added that there was no reason for the bank to start surprising markets and said its actions “will continue to be predictable” -- comments that analysts took as a sign that future rate cuts would be well flagged.

In Britain, the Bank of England’s decision to cut rates was widely anticipated by economists who expected concerns about slowing economic activity and financial market turbulence to outweigh worries about accelerating inflation.