ECB keeps rates on hold

June 7, 2001
Web posted at: 1143 GMT

LONDON (CNN) -- The European Central Bank decided to keep rates on hold at 4.5 percent on Thursday, even as economic data showed growth is slowing.

A Reuters poll of 45 analysts had 75 percent predicting the ECB would keep rates on hold. Many analysts now  expect a rate cut in July.

The latest data from the 12 nations that form the euro zone suggested the U.S. economic slowdown is now hurting growth. German unemployment rose in May by a seasonally adjusted 18,000, the fifth rise in as many months.

The ECB surprised the markets on May 10 with a quarter-point rate cut, after proclaiming such a move would be inconceivable while inflation was above its target rate of 2 percent. Inflation rose to 2.9 percent in April from 2.6 percent in the month earlier and could gather pace in May.

Many economists have argued that the ECB has not moved "swiftly" to bolster economic growth, like the U.S. Federal Reserve, which has cut rates by 2.5 percentage points this year. The Bank of England has trimmed rates three times in the same period. 

The ECB is mandated by its political masters, the European Union, to focus its attention on tackling inflation, while the Fed takes a broader growth and employment view.

Germany, the euro zone's biggest economy, and France, the single currency bloc's main growth engine, both reported slower-than-expected growth last month. The consumer price index in Germany also rose in May to a seven-year high of 3.6 percent.

Higher or steady interest rates help damp inflation and lower rates boost economic activity, so the ECB is in a quandary, say analysts.

But ECB President Wim Duisenberg told delegates at an International Monetary Conference in Singapore on Monday that he was bullish on the inflation front.

"Although current inflation figures in the euro area are adversely affected by energy prices and food prices, the current outlook is compatible to maintenance of price stability in the medium-term," he said.

The euro fell to a six-month low of 84.20 U.S. cents earlier this week and was trading at 84.82 cents before the announcement on Thursday.

A weak currency has added to the ECB's woes as inflation pushes higher and imports cost more.

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