ECB set to hold rates

July 4, 2001 Posted: 1059 GMT

LONDON (CNN) -- The outlook for the ECB's interest rate decision on Thursday has been clouded after money supply in the euro zone accelerated rapidly in May.

The ECB needs to rein in money supply, as growth in the volume of money in circulation can lead to too much cash chasing a limited supply of goods, forcing up inflation.

But European Central Bank President Wim Duisenberg appeared on Tuesday to rule out a rate cut, saying current rate levels were appropriate.

Duisenberg said the bank had not received any new data since its last meeting on June 21 to change its view that its benchmark interest rate at 4.50 percent was appropriate.

But calls from industry for a quarter-point cut in the central bank's 4.50 percent benchmark rate have been mounting amid evidence of slowing economic growth and declining business confidence. Most analysts, however, expect the rates to stay at current levels this time.

Germany's Ifo economic institute recently reported the country was close to a technical recession and confidence among business leaders had plunged to a two-year low in May – the fourth straight fall.

And data from France showed the number of jobless there rose for the second consecutive month in May.

European manufacturing has been hard hit by a slowdown in the U.S. and Asia and weak consumer demand in continental Europe.

The German economy, Europe's biggest, is especially vulnerable to a world-wide slowdown, as around 16 percent of its exports go to the U.S.

The ECB has focused on keeping inflation under control. Euro zone inflation rose to an eight-year high of 3.4 percent in May, beyond the central bank's target level of 2 percent.

Economists say inflation has been driven up by higher energy and food prices and they expect it to fall in the coming months, providing the ECB with a chance to cut rates.

Michael Lewis of Deutsche Bank told CNN: "The ECB does need to cut rates, but the market is happy with the communication of the ECB -- it's done a good job in trying to maintain stability."

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