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European Bank Decides Against Rate Cut, For Now - 2001-10-11


The European Central Bank has decided at a meeting in Vienna to keep its key interest rate unchanged at 3.75 percent, saying it wants to see how bad the economy in the 12 nation euro zone gets before it cuts rates to spur growth. The bank says a rate cut Thursday, only three weeks after its last half-percentage point reduction, would not have been enough to restore confidence on skittish European financial markets.

The European Central Bank, or ECB, has again opted to go its own way despite recent rate cuts by the U.S. Federal Reserve and the Bank of England. Those two banks have brought interest rates down to near 40 year lows, putting pressure on the ECB to play its part in boosting global economic growth.

But the ECB president, Wim Duisenberg, says two rate cuts since the end of August is enough for now. "At present there are no major imbalances in the euro area which would require a longer term adjustment process," he said. "On account of policies aimed at price stability, fiscal consolidation, wage moderation, and structural reform, the euro area fundamentals remain very positive."

In other words, Mr. Duisenberg said, Europe is neither in nor on the verge of a recession. He said he expects the euro zone economy to start improving by year's end.

Analyst Bob Parker of Credit Suisse Bank in London says Mr. Duisenberg is right not to make an interest rate cut because there is not enough economic data to justify one. "The main reason why the ECB waited today is that they want to see clearer economic evidence from the September data, and most of the September data for Euroland (the 12 EU countries adopting the euro as their common currency) obviously hasn't come out yet," he said. "We've only had a few bits and pieces of data that have come out for September. They want to actually quantify to what extent the Euroland economy continued to slow in September."

Though the ECB has always maintained that growth is important, it sees its main task as reining in inflation. But Euro zone inflation is expected to slide below the ECB's two percent target before the end of the year. Sonja Gibbs, chief equities strategist at Nomura International in London, says the Bank should act now to spur growth. "If you size up all the evidence, particularly the strong evidence that inflation will not only fall below their ceiling rate of two per cent but come perilously close to declining toward naught (zero) and even enter a deflationary phase, I think it is tremendously shortsighted to leave rates on hold at this time," Ms. Gibbs said.

According to the latest indicators, business confidence across Europe is deteriorating rapidly. Unemployment in Germany, Europe's biggest economy, has risen for the eighth straight month.

European governments are clamoring for action from the Central Bank. So, despite Thursday's decision to hold interest rates steady, many experts feel the Bank cannot hold out for much longer.

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