ECB leaves rate on hold

June 21, 2001 Posted: 1811 GMT

LONDON (CNNfn) -- The European Central Bank left its key interest rate on hold at 4.5 percent on Thursday, despite data showing an economic slowdown was gathering pace.

Ten economists and fund managers polled by CNN expected the ECB to keep rates steady but all agreed that the bank, which controls interest rates for the 12-nation euro zone, would cut rates in July.

The ECB "surprised the market on May 10 with a 25 basis point rate cut. That came against expectations, but July seems to be a better opportunity for a cut as better inflation news comes through," Steve Barrow, Currency Economist at Bear Stearns, told CNN.

Euro zone inflation rose to an eight-year high of 3.4 percent in May, above the ECB's target rate of 2 percent. Economists say inflation has been driven up by higher energy and food prices and would be expected to decline in coming months, giving the central bank the opportunity to cut rates.

German inflation data for June due out later this week is forecast to show a decline to 3.2 percent from 3.5 percent in May, according to a Reuters survey.

Most central bank watchers say the ECB finds itself in a bind as inflation rises and economic growth continues to slow.

"The ECB is in a no-win situation," Barrow said. "If it cuts rates it will be accused of taking risks with inflation, and if it doesn't cut rates, it will be accused of not caring about growth. It's boxed in."

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.

The latest indicators of economic growth paint a bleak picture for the euro zone economy. Unemployment in Germany and France, the bloc's two biggest economies, is rising.

The German economy, the biggest in the bloc, faced up to fresh downbeat forecasts this week as German Economics Minister Werner Mueller said on Tuesday growth could slide to a standstill this quarter.

The Bundesbank warned German growth remained "very subdued" in the Spring of 2001 and the IWH research institute in Halle said on Wednesday it expected the German economy to grow 1.7 percent in 2001, below the government's forecast for two percent growth this year.

Europe's corporate sector is seeing more profit warnings. The continent's three biggest chipmakers, ST Microelectronics, Infineon Technologies and Philips Electronics have warned over the last two weeks that the U.S.-led global economic slowdown is hurting their profits.

BASF, Europe's biggest chemicals company, issued a profit warning on Thursday, blaming "weaker signs of growth in Europe, and no indication of an economic upturn in the United States."

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