/www.bloomberg.com/ By Julia Kollewe
London, Oct. 6 (Bloomberg) -- The European Central Bank and the Bank of England will probably leave interest rates unchanged for an 11th month this week and may reduce borrowing costs before year's end, analysts said.
The ECB will keep its benchmark rate at 3.25 percent when policy makers meet on Thursday, said all but two of 15 economists surveyed by Bloomberg News. The U.K. bank will keep its base rate at a 38-year low of 4 percent, according to all 22 analysts polled separately.
Europe's economic growth ``will be slow and very difficult,'' said Hans-Dieter Lauer, who helps manage 8.5 billion euros ($8.4 billion) at Baden-Wuerttembergische Kapital in Stuttgart, Germany.
The economy of the dozen nations sharing the euro will grow less than 1 percent this year, the European Commission said last month. That's the slowest pace since 1993. World stock markets are tumbling as demand for goods and services drops and the threat of war in Iraq grows. The Dow Jones Stoxx 50 index of European stocks has declined 37 percent this year.
More than half the economists surveyed expect the ECB to lower borrowing costs by at least a quarter-point before the end of the year. A month ago, only a third predicted a rate cut. The Bank of England may reduce borrowing costs by the same amount, said four of the 22 analysts surveyed.
`Crawling Along'
Companies from Alcatel SA, Europe's biggest phone-equipment maker, to ProSiebenSat1 Media AG, Germany's largest television broadcaster, are lowering profit targets. Services industries shrank in September for the first time in nine months as orders fell and companies cut jobs.
In the U.S., which buys about a fifth of Europe's exports, growth slowed to an annual rate of 1.3 percent in the second quarter, from 5 percent in the first quarter.
``We are sort of crawling along the bottom right now,'' ECB policy maker Matti Vanhala said in an interview on Wednesday. Still, ``nobody in the industrial sector or the producing sector complains about the level of interest rates.''
The ECB aims to limit inflation to 2 percent, a target it has missed in 24 of the past 28 months. In September, the inflation rate increased to 2.2 percent, the highest level in five months.
``The center of our concerns is price stability, always,'' Ernst Welteke, another ECB rate setter, told reporters in Santa Monica, California, on Thursday.
With Germany, Europe's largest economy, barely growing, the Frankfurt-based central bank may yet reduce borrowing costs before the end of the first quarter, futures trading suggests.
The implied yield on the three-month Euribor contract due in March is 2.82 percent, compared with the central bank's benchmark rate of 3.25 percent.
Chances Increasing
In the U.K., four of 22 economists surveyed now predict a quarter-point reduction before the end of the year. On Sept. 20, two of 29 expected rates to fall.
Bank of England Governor Sir Edward George suggested last month that policy makers are prepared to lower rates to prevent the economic recovery from faltering. He said the bank is ``monitoring very closely'' the risks to recovery from sliding stock markets.
Most analysts expect no change in coming months.
``They've got to hold,'' said Trevor Williams, an economist at Lloyds TSB Bank Plc. ``If they cut rates, will it boost manufacturing or create a bubble in the housing market? I suspect it would create a bubble.''
House prices rose at a record pace in September, according to HBOS Plc, the country's largest mortgage lender. Bank of England policy makers have said the increases are ``unsustainable.''
As recently as June, most U.K. economists predicted rates would rise this year. A faltering recovery in the U.S. and the rest of Europe have altered those expectations. Now only three of 15 economists forecast rates to increase before the second quarter.
The Bank of England lowered borrowing costs seven times last year while the ECB cut rates four times. The U.S. Federal Reserve pared its overnight lending rate 11 times to 1.75 percent.
The Bank of England will announce its decision on Thursday at noon London time. The ECB will follow 45 minutes later. President Wim Duisenberg will brief the press from 2:30 p.m. Frankfurt time.