Mon, Apr 07, 2008 page10

• European bank expected to hold interest rate firm

  • AFP
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  The European Central Bank (ECB) should hold firm on interest rates when governors meet on Thursday, with record inflation a greater concern than slowing economic activity, analysts said.

  A large majority of analysts expect the ECB to leave its main lending rate at 4 percent, despite aggressive rate cuts by the US Federal Reserve that have pushed the euro higher against the dollar.

  “The ECB will no doubt maintain its neutral stance at Thursday’s meeting and leave interest rates as they are,” Commerzbank economist Michael Schubert said.

  “Just as in the past, the bank will keep its options open for further action,” he said in comments that summarized analyst forecasts.

  Benchmark borrowing rates in the 15-nation eurozone have remained stable since June, while US policymakers have slashed the federal funds rate by three percentage points to 2.25 percent since September to shore up economic growth.

  It is threatened by a persistent credit squeeze and a lingering US housing market downturn.

  As a result, the euro has climbed to more than US$1.56, making life difficult for eurozone exporters that ply their wares in zones that pay in dollars and sparking calls for ECB rate cuts to ease pressure on the single currency.

  But the central bank’s mandate to maintain price stability in a zone of 320 million people has been challenged by spikes in the cost of energy and food that pushed overall inflation up to 3.5 percent last month.

  That was the highest level since the euro was introduced in 1999.

  “The food-driven inflationary spike that started last summer intensified in March, creating a big hurdle to the ECB contemplating policy easing for now,” Citi analyst Jose Alzola said.

  The bank has resisted calls for rate cuts, preferring repeated interventions on money markets via refinancing operations to try and maintain market rates as close as possible to its benchmark of 4.0 percent.

  In Britain meanwhile, the Bank of England has begun to lower its main lending rate, and was tipped to cut it by another quarter point to 5 percent on Thursday in what economists said was a narrow call.

  When ECB President Jean-Claude Trichet speaks to media on Thursday, he “can also be expected to focus on the recent turmoil in the money market,” Alzola said.

  Rates on the markets banks use to lend to each other have risen recently amid renewed mutual vigilance and a tendency to hoard cash at the end of the fiscal quarter.

  But Trichet also acknowledged last week that “uncertainty about the prospects for economic growth remains unusually high.”

  Eurozone business activity slowed last month, although diverging trends were seen among the bloc’s biggest members.

  The purchasing managers’ index (PMI) compiled by NTC Research slid to 51.8 points, from 52.8 points in February, while remaining above the 50-point level and thus signifying continued growth.

  Retails sales fell by 0.5 percent in February from the previous month, and by 0.2 percent on a 12-month basis, the Eurostat statistics service reported.

  “Headwinds are materializing for growth,” Luxembourg Finance Minister Jean-Claude Juncker said on Friday in Slovenia after he chaired a meeting of his eurozone counterparts.

  “The eurozone, excluding Germany, is clearly poised for slower growth,” Commerzbank economist Matthias Rubisch said.

  But he forecast that “the ECB will not be overly concerned about the economy and will not cut rates by summer, especially since inflation is likely to remain above 3 percent well in autumn,” in reference to seasons in the northern hemisphere.

  The bank’s medium term inflation target is just below 2 percent, a level it has found very hard to reach.
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