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Thursday, 2 August, 2001, 12:49 GMT 13:49 UK
Eurozone rates left unchanged
ECB president Wim Duisenberg
ECB president Wim Duisenberg doesn't like rate-cut talk
The European Central Bank (ECB) left eurozone interest rates unchanged, despite evidence of an economic slowdown.

The bank's key refinancing rate remains at 4.5%, a level it has held since May.

The move was a rebuff of increasing pressure for a rate cut, as further evidence of Europe's economic slowdown emerged.

The ECB's decision also followed a surprise cut in UK rates by the Bank of England on Thursday.

In the face of criticism of its perceived inaction, the ECB has consistently argued that its job is to control inflation, not stimulate growth.

Psychological pressures may also have influenced its decision this time.

The ECB is about to go on its summer break, and this latest meeting was held by telephone, not in person - a sign that action to cut rates was unlikely, some argued.

Economic woes

As ECB governors prepared for their meeting, they were faced with yet more gloomy economic news from around the eurozone.

Figures released by the European Commission just minutes before the interest rate decision showed that consumer confidence around Europe had slumped again in June.

The ECB building in Frankfurt
The ECB met by phone, not in person

The Commission's economic sentiment indicator dropped to 100.6 in July from a revised 101.2 in June, with declines seen also in the indicator for industrial and consumer sentiment.

These indicators have dropped steadily since the end of last year.

At the same time, French statistics agency INSEE announced that consumer confidence in France had fallen to its lowest level in more than a year.

And in Germany, a survey of retailers predicted no growth in sales for the rest of this year.

Inflation recedes

The fact that these figures pointed towards a softening consumer market was seen as significant.

Previous economic data had focused on the suffering of the industrial sector, with robust consumer demand indicating that inflation - the ECB's main fear - may still have been a threat.

But inflation fears have eased along with consumer sentiment, and most analysts had argued that the ECB could have cut rates without endangering stability.

Few expected them to do so, however, since the bank has continually insisted that it will not be swayed by political calls for a growth boost.

Cut later

The Thursday decision is only seen as a postponement of a eurozone rate cut.

The ECB's next governors' meeting is due on 30 August, and a cut is almost unanimously expected then.

"The case for a rate cut is likely to build further during the ECB's summer break, with no immediate or sustained upswing in activity or inflation likely," said Dutch bank ING Barings in a research note.

With repeated cuts from the US Federal Reserve, and now action from the Bank of England, the ECB's case for leaving rates unchanged has become weaker, analysts said.

The euro slipped a by one-quarter of a US cent, to $0.8802. after the announcement, after trading at $0.8825 beforehand.

See also:

19 Jul 01 | Business
ECB leaves rates unchanged
18 Jul 01 | Business
Eurozone inflation dips
28 Jun 01 | Business
Europe defies calls for rate cut
14 Jun 01 | Business
ECB downgrades European growth
17 Jul 01 | Business
UK inflation stays at two-year high
05 Jul 01 | Business
European interest rates held steady
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