ECB leaves rate on hold

October 11, 2001 Posted: 1140 GMT

LONDON (CNN) -- The European Central Bank left its key interest rate on hold even as inflation and economic growth slows.

Economists polled by Reuters last week forecast the ECB may trim interest rates by a quarter point to 3.5 percent but since then members of the rate setting committee have indicated they may leave rates on hold.

The ECB joined other central banks, including the U.S. Federal Reserve, to slash rates by half a point  to 3.75 percent on September 17 to bolster confidence in the wake of the terrorist attacks on the U.S.

"We have been forecasting a rate cut but comments from the ECB suggest they may hold off," UBS Warburg economist Kevin Gaynor told CNN before the decision. "I don't think they know what they are going to do."

ECB President Wim Duisenberg said over the weekend interest rates at the moment were "consistent with maintaining price stability over the medium term" and said the ECB expected euro area growth to pick up at the end of the year.

But Belgian Finance Minister Didier Reynders and his French counterpart Laurent Fabius said the ECB had room for another monetary policy maneuver.

Mixed signals from the ECB members are not usual, and Deutsche Bank Economist Michael Lewis told CNN that the bank may wait until the present economic data was free of distortions, like the impact of the terror attacks.

"There are a lot of distortions but or sure there is worsening growth for the U.S. and Europe," said Lewis.

The ECB has cut interest rates three times this year, while the Fed has culled rates nine times to 2.5 percent, its lowest level in almost 40 years, as it attempts to save the world's biggest economy from a bruising recession.

And the Bank of England has trimmed rates six times to 4.5 percent, to shore up confidence.

The ECB has not been as active as many politicians and market watchers would have liked it to be but the central bank, which sets interest rates for the 12-nation euro zone, has a mandate to control inflation at or below 2 percent.

Euro area inflation edged down to 2.7 percent year-on-year in August from 2.8 percent, continuing its decline from its eight-year peak of 3.4 percent hit in May.

PricewaterhouseCoopers lowered its growth forecast for the European economy to 1.75 percent from 3.3 percent in 2001. Meanwhile, the International Monetary Fund revised its growth target for the euro zone to 1.8 percent from an earlier estimate of 2.4 percent.

For Germany, the largest economy in Europe, the IMF put growth this year at 0.8 percent, 1.1 percentage point below its May projection. It forecast Germany would grow by 1.8 percent next year.

"There has been an industrial recession before September 11," HSBC economist Janet Henry told CNN. "An (economic) up turn had been expected but that has been pushed out to 2002."

"Its always difficult to call (interest rates) with the ECB." Henry said. "The September 17 cut came after exceptional circumstances and now inflation and growth is falling back significantly." 

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