ECB hold rate, euro drops

May 23, 2001
Web posted at: 1143 GMT

LONDON (CNN) -- The European Central Bank, facing up to a slowdown in growth and rising inflation, decided to leave interest rates on hold at 4.5 percent.

The decision comes as the euro, the common currency for the 12-nations that make up the euro zone, fell to a six-month low on Wednesday after key data from the zone's biggest economies showed growth was slowing.

A Reuters poll of 45 economist showed they expected interest rates to remain unchanged at 4.5 percent. Only one expected the ECB to cut rates but 80 percent thought the rate cut was likely in June or July.

"It's a tough decision with a slowdown in growth and increase in inflation rates," Ralph Solveen, an economist at Commerzbank, told CNN before the rate decision. "The ECB is expected to cut rates by 0.25 percentage point by the end of June."

The central bank surprised the markets earlier this month with a quarter-point rate cut, citing faltering economic growth, while saying inflation is likely to slow next year. 

Growth in Germany, Europe's biggest economy, which represents one third of the euro zone output, grew a less-than-expected 0.4 percent in the first quarter. Germany's key Ifo business climate figure fell to its lowest level in almost two years on Tuesday.

The central bank faces a balancing act between responding to economic weakness, which in the longer run should damp price pressures, and preventing a rise in inflation expectations as current headline rates keep rising.

German inflation is expected to vault to an annual 3 percent in May after a seven-year high of 2.9 percent in April, the same as in the euro zone and well above the ECB medium-term 2 percent ceiling.

France, so far the single currency bloc's main growth engine, started sputtering with Wednesday's first-quarter gross domestic product growth coming below expectations at 0.5 percent quarter-on-quarter.

The euro weakened against the U.S. dollar, fetching 85.67 cents from a high of 86.62 in London trade. The euro dropped nearly three yen from the day's highs against the yen to a low of ¥103.64.

BNP Paribas's Chief Euroland Economist Ken Wattret told CNN that the euro was loosing "credibility" with its continuing downward spiral.

Wattret said the ECB cannot hike rates because of weak growth in the euro zone and a weak currency would only suck in more expensive imports, which would continue adding to the inflationary pressures.

--from staff and wire reports

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