ECB keeps rates on hold, again

The ECB has kept rates on hold since November after a series of cuts in 2001

FRANKFURT, Germany -- Faced with growing evidence of a sluggish economic recovery and increasingly volatile financial markets, the European Central Bank decided on Thursday to keep interest rates on hold for the tenth month in a row.

The decision, which was widely expected, leaves the ECB's key lending rate at 3.25 percent in the 12 nations that share the single euro currency. The rate has been unchanged since last November, when the bank ended a round of cuts aimed at propping up a slumping economy.

The ECB decision follows a similar move last week by the Bank of England. The BoE, faced with similar weak economic data, left its key rate unchanged at a 38-year low of 4 percent.

"Given that the expected pace of the recovery has been scaled down over recent months, sharp declines in stock prices are having a negative effect on consumer and investors confidence," Wim Duisenberg, the ECB president, said at news conference in Frankfurt, following the rate announcement.

"Consequently, the strength in the upturn in economic activity has become more uncertain inside and outside the euro area."

MORE STORIES • Consumers lift French economy  • Central banks keep rates on hold  • BoE keeps rates on hold

Analysts are now divided over whether the next ECB rate move -- whenever it comes -- will be up or down.

Many expect the ECB will cut rates at the end of this year if economic data does not improve and markets remain soft.

Others, however, believe if markets recover over the next few months, the ECB could start pushing rates higher sometime in early 2003. "A rise has become a real possibility," Holger Schmieding, European economist at Bank of America in London, told CNN.

The rate debate has been raging for months, with forecasts of a strong and sustained recovery in the global economy turning increasingly gloomy as countries struggle to eke out even meagre growth.

"Business confidence is ailing, industrial orders and output remain on a weakening trend, investment intentions are sagging, employment prospects remain soft and consumer confidence and spending remain on a downward trend," according to investment bank Bear Stearns.

So far, economic numbers are pointing to a continued weak recovery in Europe.

Last week, the European Union predicted economic growth of just 0.3 percent in the second quarter of this year and it scaled back its forecast for the third quarter to between 0.3 and 0.6 percent -- down from a previous estimate of 0.6 to 0.9 percent.

Growth in the fourth quarter is also expected to be between 0.3 and 0.6 percent, the EU said.

France, which has the eurozone's second biggest economy, has been performing better than most of its eurozone partners.

Its gross domestic product grew by 0.5 percent in the second quarter, slightly lower than economists had expected, but at the same pace as in the previous three months.

Germany, the largest economy, posted GDP growth of 0.3 percent in the second quarter, while No. 3 Italy saw its economy expand by 0.2 percent.

"The latest second-quarter... GDP data show that the eurozone recovery is within a hair's breath of stalling out altogether," Bear Stearns said.

Merrill Lynch has lowered its 2002 growth forecast for the eurozone to 0.8 percent from 1 percent, and cut its 2003 outlook to 2.4 percent from 3 percent. "The eurozone has delivered a larger downside surprise on GDP growth this year than either the U.S. or the UK," Merrill Lynch said.

Unemployment remains high in the eurozone, with the jobless rate running at 8.3 percent for the past two months, according to Eurostat, which compiles data for the 12-nation group.

Eurostat said Germany's jobless rate was also at 8.3 percent in June and July, while unemployment in France came in at 8.9 percent for both months. Spain has been the hardest hit, with 11.3 percent unemployment in July, up from the 11.2 percent in June. Finland was unchanged at 9.3 percent.

Luxembourg had the lowest rate at 2.4 percent in July, compared to 2.3 percent in June. Austria was next with 4.1 percent unemployment in July, unchanged from the previous month.

The rate of inflation -- the main barometer used by the ECB uses to set monetary policy -- has risen above the bank's 2 percent target ceiling. Prices increased by 2.1 percent in August from 1.9 percent the previous month.

But given the eurozone's weak economic outlook, few people -- including Duisenberg -- expect inflation concerns to overshadow the need to encourage growth.

"At this juncture, there is less risk that excess liquidity will translate into inflationary pressure given the environment of subdued demand," Duisenberg said at Thursday's news conference.

"The trend in the growth of loans to the private sector also seems to point in this direction."