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ECB holds the line on rates
FRANKFURT, Germany (CNN) -- The European Central Bank on Thursday kept rates unchanged even as evidence mounts that Germany, the region's main economic engine, is showing few signs of recovery. The decision follows a similar move by the Bank of England on Thursday, which kept its main lending rate at 4 percent. (Full story) The ECB lowered its key lending rate in December by a half percentage point to 2.75 percent. That was the first change in borrowing costs since November 2001. Prior to that, the ECB cut rates four times in one year in an effort to rescue the 12-nation euro zone from the grips of the global economic downturn. "The risks to the downside have somewhat increased," ECB President Wim Duisenberg told a news conference on Thursday. "We had hoped that this uncertainty would gradually disappear... but [it] is still prevailing and permeates the minds of consumers and investors alike." Many analysts now expect the ECB to cut its key rate in the coming months, with the economy showing few signs of sustained growth. "Everywhere you look in the euro zone right now the outlook remains very gloomy. There seems to be no end to the negative news on growth prospects as the downturn continues to dig deeper," Bear Stearns said in a note to investors. "Business and consumer confidence is still showing no signs of bottoming out, and still in need of a better remedial lift," the investment bank said. "We think the ECB could be in a position to cut rates as soon as the February monetary meeting, rather than wait until March, as the majority consensus in the market expects." The latest bad news for the ECB came earlier on Thursday, with the Germany government announcing that unemployment rose by 28,000 in December to a seasonally adjusted 4.197 million. That is the highest level in four years. (Full story) Germany continues to be the hardest hit in Europe as it struggles to reduce its budget deficit through spending cuts and tax increases in an effort to meet European Union guidelines. (Full story) At the same time, the country is facing meagre economic growth as consumer spending declines. On Tuesday, Germany's statistics office said that seasonally-adjusted retail sales fell 3.2 percent from the previous month. "It's a big disappointment,'' Ralph Solveen, an economist at Commerzbank in Frankfurt, told Reuters. "It shows all the talk about the government's tax plans had a much bigger impact on private consumption than we had thought.'' Chancellor Gerhard Schroeder, re-elected in September, has unveiled tax increases and spending cuts to meet a budget shortfall that his government says it was unaware of before the vote. But on Wednesday, the European Commission set a deadline of May 21 for Germany to adopt measures to cut its budget deficit further this year. The Commission -- the administrative arm of the 15-nation European Union -- also confirmed that Germany exceeded its budget deficit limit of 3 percent of gross domestic product in 2002. (Full story) Last Friday, a closely-watched survey showed consumer confidence in Germany was wavering amid rising unemployment, tax increases and ongoing nationwide strikes. The Nuremburg-based market research group GfK said its economic expectations index fell to minus 26.6 in December from 25.7 in the previous month. That was the lowest level since November 2001 when Germany was in the midst of recession. "The outlook for consumer sentiment in the next months could also best be described as modest," GfK said. "Tax increases as well as the weak labour markets stand in the way of lasting improvement in consumer sentiment until probably mid-2003." The euro zone is still struggling to eke out meagre growth, expanding by just 0.8 percent in 2002. On Thursday, the ECB cut back its forecasts for fourth quarter economic growth to between 0.1 percent and 0.4 percent, down from an earlier outlook of 0.2-0.5 percent. The economy expanded by 0.3 percent in the third quarter. It expects growth will be limited to between 1.1 and 2.1 percent in 2003 and between 1.9 and 2.9 percent in 2004. The Organisation for Economic Cooperation and Development has already trimmed 2003 growth forecast for the euro zone to 1.8 percent in 2003 and 2.7 percent in 2004 -- slightly above the consensus forecasts, but tempered by concern over the fragile state of the manufacturing sector as exports and consumer demand remain weak.
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