Eurozone interest rates unchanged

The cautious Mr Duisenberg is never keen on rapid rate cuts

The European Central Bank (ECB) has left interest rates unchanged, despite growing pressure for a cut to boost the flagging eurozone economy.

The ECB's main interest rate remains at 3.75%.

The ECB last cut rates - a half-point drop from 4.25% - on 17 September as part of a concerted response by central banks to the terrorist attacks on New York and Washington.

But while other central banks around the world have continued to cut, the ECB has dug in its heels, also leaving rates unchanged at its regular meeting a month ago.

In a post-announcement briefing, ECB president Wim Duisenberg defended the bank's inaction.

"It is doubtful whether a range of rate changes coming quickly one after the other by themselves... would enhance confidence rather than maybe even undermine confidence.

"The public has to have confidence in its central bank, in its pursuit of price stability over the medium term."

Lack of consensus

The financial markets were taken somewhat aback by the decision, having anticipated a quarter-point cut.

In the hours after the announcement, the euro dropped below 90 US cents, its lowest point against the dollar since before the 11 September attacks.

European stock markets were untroubled, however, building on their modest early gains in the minutes after the rate decision.

Over the past few days, ECB officials and policymakers have broadly repeated the established pre-attack line - that the European economy would not benefit from an opportunistic rate cut.

But many economists felt that such statements were simply part of the ECB's strategy of keeping the markets guessing, in order that its rate moves should have a greater effect.

Worries over growth

The argument for a rate cut was based, as at previous ECB meetings, on the slowing European economy.

Weakening economic growth, especially in larger countries such as France and Germany, has sharply undermined consumer confidence around the region.

But the ECB has long maintained that its job is not to boost economic growth, or bolster confidence.

Rate-cut proponents argued that inflation was low enough to allow for a cut this time.

Eurozone inflation slowed in August to 2.7%, from 2.8% the preceding month, and well below an eight-year peak of 3.4% reached in May.

A strategic mistake?

This makes it likely, analysts say, that the ECB will eventually cut rates in the near future.

"I do think they will cut more in this cycle and specifically later this quarter... my timetable is for a cut in November," said Jose Alzola of Citibank in London.

Some analysts believe the ECB was wrong to delay their move.

"It was a strategic mistake, they should have cut rates today," Bear Stearns' chief economist David Brown told the BBC's World Business Report, voicing his fears of recession.

"I don't think policy will be steady for long, the underlying message is there is room for manoeuvre on the downside and rates will be cut over the coming weeks," he added. "They didn't want to be seen cutting rates three times in six weeks. It would have given the impression that it was hitting the panic button."

Cautious comments

One signal for the ECB's decision came in earlier comments from Mr Duisenberg on the fringes of a meeting of the G7 industrial countries in Washington on Saturday.

Mr Duisenberg said that the bank's monetary policy is "consistent with the maintenance of price stability".

But he muddied the issue, by suggesting that inflation fears were easing by pointing to declining oil prices and a stronger euro, both of which lower the cost base for European companies.