ECB keeps interest rates on hold
The European Central Bank left interest rates unchanged yesterday as concern that economic growth is slowing prevents it from acting against faster inflation.
The Frankfurt-based ECB kept the benchmark refinancing rate at 4 percent.
The ECB has threatened to raise rates as workers demand bigger pay increases to compensate for the higher cost of living. Signs of slowing growth in the 15-nation euro region are staying its hand. The US Federal Reserve has lowered rates three times to stave off a recession in the world's largest economy.
"The ECB's hands are tied at the moment," said Kenneth Broux, an economist at Lloyds TSB Group Plc in London. "Recent data clearly point to growing inflation risks, but it has to wait and see what the impact of the credit crisis on growth will be."
The US housing slump made banks reluctant to lend, pushing up credit costs and threatening to curb company investment, a plank of European economic expansion last year. US subprime-mortgage defaults have already forced financial institutions to announce about $100 billion of asset writedowns and losses.
The euro declined to $1.4642 after yesterday rate decision from $1.4676 beforehand.
While coordinated central-bank intervention in December managed to drive down inter-bank lending rates, the cost of borrowing euros for three month is still about 60 basis points above the ECB's key lending rate, compared with an average of 25 basis points in the first half of 2007.
"The ECB is too optimistic on the growth outlook," said Stephan Rieke, an economist at BHF-Bank AG in Frankfurt. "Risks are significantly bigger" than the bank projects.
Oil prices around $100 a barrel are boosting inflation. They're also eroding companies' and consumers' purchasing power just as the euro's 13 percent gain against the dollar in the last 12 months makes European exports less competitive.
European economic confidence fell in December to the lowest in almost two years, retail sales tumbled the most in at least 10 years in November and industrial production declined in Germany, France and Spain.
Agencies
(China Daily 01/11/2008 page17)
