European Central Bank leaves interest rates unchanged
FRANKFURT, Germany (AP) – European Central Bank officials wrestled with whether to join the U.S. Federal Reserve in cutting interest rates before deciding Thursday to keep its key financing rate steady at 3.25 percent – suggesting the ECB is increasingly concerned about sluggish growth. Following the decision, ECB president Wim Duisenberg’s made an unusual reference to debate by bank officials, saying “in view of the high uncertainty on future growth, and its implication for medium-term inflation developments, the governing council has discussed extensively the arguments for and against a cut in the key ECB rates.”
Worries about growth pushed the Fed to cut the U.S. benchmark federal funds rate by an unexpectedly large half-percentage point to a 41-year low on Wednesday.
Many economists think the ECB will follow suit as early as the next interest-rate meeting Dec. 5 as European economies continue to falter. Its key refinancing rate has been unchanged since Nov. 8, 2001.
The bank, which is politically independent, has been lobbied heavily to cut rates by France and Germany, which hope looser monetary policy will boost their economies and help them reduce budget deficits. The Fed cut rates 11 times last year and once this year.
The Bank of England also held off Thursday and kept rates unchanged. Duisenberg usually deflects questions about deliberations on the board, made of six executive members and the heads of the 12 national central banks in the countries using the euro currency. The board doesn’t publish minutes or how members voted later like the Fed does.
While Duisenberg conceded it was the first time he had referred to board discussion, he added that “this says nothing about the size or moment of a rate cut some time in the future.”
Nonetheless, many economists expect the bank is only waiting for more data confirming pessimistic views that Europe’s economy isn’t bouncing back from sluggish growth of 0.4 percent in the second quarter. Rate cuts can help get the economy going by lowering borrowing costs for businesses and consumers. Duisenberg said the bank stuck to its forecast that growth will bounce back sometime next year, citing forecasts from international organizations and many private economists.
He added however that “the uncertainty surrounding this scenario remains high” and that it was “very difficult at this juncture to predict the timing and strength of the economic upswing.”
Risks include higher oil prices and “geopolitical tensions,” he said, in a likely reference to possible U.S. military action against Iraq.
Meanwhile, Duisenberg’s discussion of inflation was relatively muted. Fighting inflation is the bank’s main job, and worries about inflation would argue against lower rates because they can fuel higher prices.
“There is a significant minority within the ECB council that may have voted for a rate cut,” said Commerzbank economist and bank watcher Michael Schubert. “They came nearer to a rate cut, and now everything depends on the information that comes in the coming weeks, on the leading indicators.”
“If they fall again, this significant minority will grow to a majority,” Schubert said. Leading indicators are predictors of future growth such as business sentiment or factory orders.
Duisenberg also reiterated his defense of the Stability and Growth Pact, the deal under which countries agreed to keep deficits under 3 percent of gross national project. Germany has said it will go over the limit this year, and has called for more flexibility.
Duisenberg called the limits “indispensable” for sound public finance and keeping prices stable.