BBC Homepage World Service Education
BBC Homepagelow graphics version | feedback | help
BBC News Online
 You are in: Business
Front Page 
UK Politics 
Market Data 
Your Money 
Business Basics 
Talking Point 
In Depth 

Thursday, 26 April, 2001, 12:19 GMT 13:19 UK
Europe holds rates steady
ECB President Wim Duisenberg is determined to fight inflation
ECB President Wim Duisenberg is determined to fight inflation
The European Central Bank has decided to leave interest rates unchanged at latest board meeting in Frankfurt.

Rates have now remained unchanged at 4.75% since October in the eurozone - made up of the 12 EU countries who use the euro, despite the sharp slowdown in US economic growth.

It is hard to see what would be lost through an interest rate cut

Stanley Fisher, Deputy Head, IMF
Both the US Treasury Secretary, Paul O'Neill, and the head of the International Monetary Fund, Horst Kohler, have urged the ECB to cut interest rates to avert a global slowdown.

They are likely to raise their concerns again at the IMF meeting in Washington this weekend.

Economists say it is now unlikely that the ECB will cut rates until later this year.

"They do not intend to cut rates in the near future," said Volker Nitsch of Bankgessellschaft Berlin.

The euro was little changed after the decision, which was widely anticipated by financial markets.

It was trading at $0.8950, still a few cents above its all-time low reached late last year.

Contradictory pressures

The ECB argues that the growth prospects in Europe are still strong, and that inflation is still a danger.

Two weeks ago, ECB President Wim Duisenberg said that he "heard, but did not listen" to calls for a rate cut.

The pressures that are facing the ECB were demonstrated by two economic figures released on Thursday.

In France, business confidence fell sharply to its lowest level in two years, as companies reported a slowdown in output and a thinning of foreign orders - paralleling a similar, even sharper drop in business confidence in Germany, Europe's largest economy.

But also in Germany, producer prices rose in March at an annual rate of 4.9%, the highest rate of increase since 1982, driven by higher food prices.

The news has led some members of the ECB council to adopt a cautious stance.

"We are forward-looking in our policy so it's not totally determined by headline inflation. (But) inflation shows there are still risks," Portugal's central bank governor Vitor Constancio told reporters as he entered the rate-setting meeting.

Growth forecasts

The dilemma facing the ECB is how fast the European economy might slow down in response to the US recession.

That, in turn, depends how long the slowdown in the US lasts, and whether the four interest rate cuts by the US central bank, the Federal Reserve, have any effect.

The International Monetary Fund forecast, to be published later on Thursday, is that US growth will slow from 5% in 2000 to 1.5% in 2001, reducing the growth rate in the eurozone from 3.4% to 2.4%.

The European Union, however, estimates that eurozone growth will only fall from 2.8% to 2.6%.

"The prospects for further economic growth in Europe have been receding for over half a year", IMF deputy director-general Stanley Fischer said.

"Above all, German economic growth has significantly slowed. It is hard to see what would be lost through an interest rate cut," he added.

However, ECB leaders say it has a fundamentally different strategy of focusing purely on inflation.

"Monetary policy is no instrument of cyclical economic policymaking," Bundesbank head Ernst Welteke said.

"The ECB differs fundamentally from the US central bank, the Fed, in terms of its task and strategy," he added.

Search BBC News Online

Advanced search options
Launch console
See also:

25 Apr 01 | Business
EU downgrades growth estimate
25 Apr 01 | Business
IMF warns of global slowdown
23 Apr 01 | Business
Gloom hits German businesses
Internet links:

The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.

E-mail this story to a friend

Links to more Business stories