Eurozone rate cut on hold

ECB president Wim Duisenberg: cautious on rate cuts

The European Central Bank has decided to leave interest rates unchanged at 4.75% despite fears of an economic slowdown.

It is the only major central bank not to have lowered interest rates this year as fears grows of a recession in the US.

"It is a lost chance to impress markets and do something good for the euro," said Adolph Rosenstock of Nomura in Frankfurt.

The news sent the euro, the single currency used by 12 European countries, tumbling to a new low this year against the dollar of $0.8821.

But analysts remain convinced that rates will soon go lower, as fears grow that the slowdown in the world economy will hurt the European recovery.

New figures showing that French business confidence fell for the fifth month in a row reinforced the message that interest rates were going to move down further.

"Our expectation remains that slower export growth will lead to increased weakness in industrial production and headline GDP growth in coming quarters," said investment bank UBS Warburg.

However, Spain warned that the ECB needed to take into account economic conditions throughout the eurozone. Spain's economy is growing strongly, but inflation is more than 4% per year.

The news could influence the Bank of England to hold off any further rate cuts for the UK when it meets next week.

Slowdown in Germany

In recent months, the eurozone economy had shown some signs of emerging from the recession it was mired in for much of the 1990s.

But recently the signs have turned negative.

Figures released last week showed that industrial production in the euro-zone countries fell 1.9% percent in January from December, far below economists' expectations of only a 0.2% decline.

And business confidence in Germany has sunk to its lowest level since July 1999, signalling a deterioration in the outlook for Europe's biggest economy.

The closely watched Ifo business climate index for west Germany tumbled further than expected in February.

The German economy is the biggest in the 12-country eurozone, making up one third of the total eurozone output. The health of its economy is a significant indicator for the whole euro area.

"It's very poor. It raises the chance of seeing a 50 basis point interest rate cut from the ECB rather than 25 (basis points), when they eventually start moving," Merrill Lynch's Peter Saacke said at the time.

Inflation threat

Part of the reason for the ECB's reluctance to cut interest rates has been stubbornly high inflation.

Inflation has been above the ECB's medium-term ceiling of 2% since last May and was 2.6% on February, thanks largely to high oil prices.

But ECB governors have indicated recently that they are no longer as worried about inflation.

"While we were very, very concerned about inflation a month or a month and a half ago, we're not anymore today," Bank of France governor Jean-Claude Trichet said.

However, with inflation much higher in smaller countries like Republic of Ireland and Spain, the ECB may be reluctant to act too abruptly for fear of disrupting their economies.