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Top Financial News
04/26 07:45
European Central Bank Keeps Benchmark Interest Rate at 4.75%
By Rainer Buergin
Frankfurt, April 26 (Bloomberg) -- The European Central Bank kept its benchmark interest rate at 4.75 percent as inflation in the dozen countries that share the euro shows no sign of receding in the next few months.
ECB President Wim Duisenberg faces the dilemma of rising prices and slowing growth. The European Union yesterday reduced its euro-area growth forecast for this year and companies such as Siemens AG and Moulinex SA are firing workers. The bank won't help because prices are rising too fast.
``An economic slowdown has been evident for months, but the ECB has maneuvered itself into a corner,'' said Gustav-Adolf Horn, chief economist at the DIW research institute in Berlin. ``There's a chance they won't cut at all this year.''
Inflation has exceeded the ECB's 2 percent ceiling for 10 months, and may do so again in coming months. German consumers paid more for goods and services in April, figures released today showed.
Prices in Europe's largest economy rose at an annual rate of 2.8 percent from 2.5 percent in March. In Italy, consumer prices gained 3.1 percent in April, more than expected, figures from a dozen cities showed. In March, the euro-area inflation was 2.6 percent.
G-7 Meeting
The ECB is the only major central bank not to reduce borrowing costs this year. By doing nothing, the bank courts confrontation with the U.S. when officials from the Group of Seven major industrial nations meet in Washington this weekend.
U.S. Treasury Secretary Paul O'Neill said last week he is ``mystified'' by the economic optimism of European officials. The International Monetary Fund, which sees euro-zone growth slowing to 2.4 percent this year, said a ``moderate'' rate reduction is ``appropriate.''
Duisenberg hasn't lowered rates for two years. The U.S. Federal Reserve has reduced rates four times since January. The Bank of England and the Bank of Japan have followed.
Unlike the Fed -- which also has a mandate to boost employment -- the ECB's chief goal is inflation. The risk is that by standing pat, growth in Europe will disappoint.
``In a world where markets evolve quickly, they have to learn how to anticipate,'' Jean-Marie Messier, chairman of Vivendi Universal SA, told French radio station RTL. ``The ECB should have already acted.''
`Big Mistake'
The ECB should follow the Fed, said Juergen Peters, deputy chairman of Germany's IG Metall engineering and metals workers union. A cut is ``urgently needed'' in the euro area to spur the economy, he said.
European companies will see exports increase at a slower pace as U.S. growth could be as little as 1.5 percent this year, according to International Monetary Fund Chief Economist Michael Mussa.
``It's a big mistake that the ECB hasn't followed the U.S.,'' said Michael Groeller, chief executive of Mayr-Melnhof Karton AG, Europe's largest maker of recycled carton board. ``We are trying to tackle a reduction in order intake by reducing production.'
Slowing growth in Europe is particularly evident in Germany, where companies were more pessimistic in March than at any time in the past 20 months and unemployment rose for a third month in a row.
``Our U.S. customers are very hesitant about buying at the moment or they are postponing certain projects,'' said Peter Rau, chief financial officer at Ixos Software AG. U.S. sales fell 19 percent in the third quarter, the company said.
European Economies
German growth will slow to 2.1 percent from 3 percent last year, the six leading state-backed research institutes said two weeks ago. Siemens said today it will cut 3,500 more jobs after second-quarter profit fell 11 percent. Earlier this month, the company had said it will sack 2,000 workers making mobile phones.
Business confidence is also sliding in France and Italy, which together with Germany make up about three-quarters of the euro-zone economy. France's Schneider Electric SA, the biggest maker of low-voltage electrical equipment, forecast slowing sales growth this year as demand in the U.S. drops.
Scania AB, the third-largest maker of heavy trucks, will cut 1,200 jobs in Europe after first-quarter profit fell 13 percent and Western European sales declined. And Moulinex said it will cut 4,000 jobs and close four European factories to trim costs.
Even so, there are some signs EU countries are weathering the global slowdown. French consumer spending rose in March for the fourth time in six months. The gain in spending was almost three times that predicted by economists. Euro-area industrial production unexpectedly rose in February.
The European Commission, while revising down its forecast for euro area growth, yesterday said the effects of the global slowdown on the European economy be limited thanks to resilient domestic demand. ``Monetary conditions remain conducive to growth,'' the Commission said.
Money Supply
Ernst Welteke, president of the Bundesbank, said in a newspaper interview that interest rates are ``not an instrument for boosting growth.'' The ECB, unlike the Fed, cannot point to flagging economic growth to justify its decisions because of its mandate to keep prices under control.
Some economists say a slowdown in M3 money supply would make it easier for the ECB to lower interest rates even as inflation continues to exceed its ceiling. The ECB monitors M3 as it says too much money chasing too few goods drives up inflation.
M3 growth is expected to slow to 4.5 percent in March. This would be the first time the ECB reaches its target of 4.5 percent M3 expansion.
``Current interest rates will prove too high'' to keep M3 expansion near the ECB's target, or reference value, of 4.5 percent, said Thorsten Polleit, an economist at Barclays Capital in Frankfurt.
Next ECB Meeting
The ECB in its April monthly bulletin said upward risks to price stability from monetary developments have ``diminished.''
Of 32 economists and investors polled by Bloomberg News, 15 foresee a rate cut in May, 10 expect a reduction in borrowing costs in June and 5 forecast a cut in the third quarter. One expected a move today and another sees no rate cut this year. Policy makers next meet May 10.
Investors currently price in a cut in interest rates of at least 25 basis points by September. The implied yield on September Euribor interest-rate futures contracts was at 4.44 percent, 31 basis points below the current benchmark rate. |
