Euro Bank Keeps Rates Unchanged
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European Central Bank Leaves Key Interest Rate Unchanged, Sticking to Its Hard Line Against Inflation
Thursday August 2, 8:10 am Eastern Time
FRANKFURT, Germany (AP) -- The European Central Bank left its key interest rate unchanged Thursday, sticking to its hard line against inflation despite pressure to cut rates and stimulate the European economy.
The decision, widely anticipated by most economists, came after top officials from the Frankfurt-based central bank assessed the economy in the 12 European Union countries using the euro common currency.
Some economists had already begun to wonder if a rate cut alone would be enough to spur a rebound.
``What we have learned is that the tools of central bankers and ministers of finance are not very efficient when it comes to quick fixes,'' said Stefan Schneider, an economist with Deutsche Bank.
The U.S. Federal Reserve has slashed interest rates six times this year in an effort to boost the U.S. economy, and it is widely expected to cut rates again at its next meeting Aug. 21. In the meantime, however, the U.S. economy has slowed to its weakest performance in eight years.
In Europe, by contrast, the ECB has cut rates only once: a quarter-point decrease May 10, taking them to 4.5 percent. That's despite persistent pleas from politicians and economists to follow the U.S. lead.
One reason for the emphasis on interest rates in Europe is that national governments there can do little to spur the economy by expanding their budgets. As members of the 12-country euro-zone, they have agreed to meet strict guidelines on reining in budget deficits.
Yet while many economists are still pushing for a rate cut, they admit it's no silver bullet.
``I'm reluctant to say it has no effect,'' Schneider said. ``But in the U.S., rate cuts only fired on one cylinder when they normally fire on two or three.''
Few economists expected the Frankfurt-based central bank would cuts its main interest rate Thursday.
Cutting interest rates tends to boost a flagging economy by making it easier for people and businesses to borrow money. The trade-off, however, is that keeping interest rates high is one way to dampen inflation.
That's a problem for the ECB because although inflation dipped to 3 percent in June, it's still far above the bank's target level of 2 percent.
Economists say the ECB is waiting for clear signs that inflation is ebbing before cutting rates.
So far, there has been no hint that ECB President Wim Duisenberg is wavering from his statement last month that the current level of interest rates was appropriate ``for some time to come.''
That stance was supported just last week by German central banker Ernst Welteke, who told German radio: ``We have to wait a bit longer to see if the trend of slowing prices is really sustained.''
Since then, the European economy has been hit by more bad news.
Figures released Wednesday showed that Europe's manufacturing activity shrunk in July for the fourth month in a row to its lowest level since 1998. That followed rising unemployment figures in France and stagnant unemployment figures in the euro bloc.
``It's quite clear from the economic data that the euro zone is undergoing a significant slowdown,'' said Jane Foley, an economist with Barclays Capital, who added that the region's economy has yet to bottom out.
Foley said a rate cut would help brake the economic slowdown, but warned any decrease wouldn't be felt immediately. Economists say it takes six to 18 months for lower interest rates to feed a turnaround.
In the meantime, economists will be looking for signs that an ECB rate cut is in the works. Inflation is expected to tail off further this year, possibly giving the central bank room for a cut at the end of August or in September, many economists forecast. |
