ECB, UK keep rates on hold

July 5, 2001 Posted: 1153 GMT

LONDON (CNN) -- The European Central Bank has kept its benchmark interest rate on hold amid weak economic performance in the euro zone.

The move was widely expected after ECB President Wim Duisenberg said on Tuesday 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.

The central bank last cut its rate, to the surprise of most analysts, on May 10.

Calls from industry for a quarter-point cut had been mounting amid evidence of slowing economic growth and declining business confidence.

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.

Figures released on Thursday also showed the German unemployment rate rose for the sixth straight month in June.

The seasonal jobless figure climbed by 22,000 to 3.8 million, higher than expected, adding to the gloomy outlook for Europe's biggest economy.

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

The outlook for the ECB's decision had 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.

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 is especially vulnerable to a world-wide slowdown, as around 16 percent of its exports go to the U.S.

But the ECB has remained 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."

Earlier, The Bank of England also kept its key interest rate on hold at 5.25 percent on Thursday, as had been widely expected.

Rate cut calls by UK manufacturers suffering slower profit growth were offset by robust consumer spending and a booming housing market that the bank felt could contribute to inflation gathering pace.

The bank last cut UK interest rates on May 10 by a quarter point, but they are still the highest among leading industrial nations.

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