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Thursday, 2 March, 2000, 11:22 GMT
ECB keeps rates unchanged

The European Central Bank has decided to keep interest rates for the 11-member eurozone unchanged.

The bank resisted pressure to raise interest rates to support the euro, which this week fell to a fresh low of $0.93.

This was far below its launch value one year ago of about $1.17.

Following the meeting, the euro dipped against the dollar but quickly bounced back to $0.97.

Wim Duisenberg: talking up the euro
Wim Duisenberg: talking up the euro

Analysts welcomed the ECB decision.

"An interest rate hike at this point would have given the impression of a nervous reaction to the euro's fall early this week," Michael Schubert, an analyst at Commerzbank, said.

He added: "As many others, we do believe that an interest hike is necessary, but did not think it would come this week."

Some dealers believe that, with interest rates in Europe half the rate in the United States, only robust action by the ECB can stop the currency falling further.

But the ECB has always made it clear that it targets inflation, not exchange rates, and any premature move to raise rates could damage its still fragile credibility, and hurt the eurozone's economic recovery.

Furthermore, the ECB has already raised rates during the past fortnight to the current level of 3.25%.

Instead, the ECB and European governments hope to talk up the value of the euro.

Talking up the euro

Hans Eichel, the German finance minister, says that markets should pay attention to the fundamentals which suggest a strong euro.

"Let there be no doubt. We want a strong external value for the euro ... (but) short term intervention does not have nearly the effect that good fundamental data should have," he said.

Some analysts expect the ECB to wait at least another month before raising rates.

Inflation worries

Of course, with Europe now coming out of its economic slowdown, there are reasons for the ECB to raise interest rates.

The euro has been falling in currency markets
The euro has been falling in currency markets
Oil prices have surged to over $30 a barrel, adding inflationary pressures to the world economy.

Inflation in the 11-nation eurozone reached 2% in January - at the top of the ECB target zone of 0%-2%.

Otmar Issing, the ECB's chief economist, and Ernst Welteke, the head of the Bundesbank, are inflation hawks, arguing that monetary conditions in Europe are "too accommodating."

Germany recovers

Germany, the eurozone's biggest economy, is expected to grow by 3.0% this year compared to just 1.5% last year.

Its growth has actually been boosted by the weak euro. Germany is the world's second-largest exporter, and the weak currency has made its exports more competitive on world markets.

German exports in the last quarter of 1999 grew by 9.1% compared to the same period one year ago, boosted by the recovering world economy as well as the weak euro, partly compensating for weak domestic demand.

With the eurozone as a whole set to grow by 3% this year, compared to just 2.2% in 1999, most experts believe that it is just a matter of time before the ECB does raise rates - probably by as much as 1% by the end of the year.

That would see the ECB following the same trend that is already driving central banks in the USA and the UK to raise rates sharply, in response to the world economy's recovery from the Asian crisis.

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See also:

28 Feb 00 |  Business
Euro rebounds from record low
25 Feb 00 |  Business
ECB 'must be more accountable'
03 Feb 00 |  Business
ECB puts interest rates up
30 Dec 99 |  Business
The euro's troubled first year
03 Dec 99 |  Business
When is a weak euro a problem?
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