European Rates on Hold as Economic Worries Mount | Business| Economy and finance news from a German perspective | DW | 04.09.2008
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European Rates on Hold as Economic Worries Mount

The European Central Bank (ECB) kept rates on hold at 4.25 percent despite signs that inflationary pressures are easing and fears are growing that large parts of Europe's economy are edging towards recession.

European Central Bank at night

Inflation worries are high in the euro zone

The Frankfurt-based ECB had raised its benchmark refinancing rate by 25 basis points in July to ward off the threat posed by resurgent inflation.

The decision on Thursday, Sept. 4, to leave monetary policy unchanged was in line with analysts' forecasts.

However, ECB Jean-Claude Trichet is expected to use his regular monthly press conference scheduled for later on Thursday to again express the Frankfurt-based bank's worries about high inflation triggering a wage-price spiral.

Analysts say inflation could rise

Ahead of the ECB's rate decision, the Bank of England announced that it had also kept rates on hold for the fifth month in a row at 5 percent as high inflation limits the London-based bank's scope for cutting borrowing costs in response to slumping economic growth and falling house prices.

At 4.4 percent, inflation in Britain is more than double the London-based central bank's 2 percent target.

Economists expect inflation could rise to 5 percent this year.

But a growing number of economists believe that the Bank of England's nine-member monetary committee headed up by Governor Mervyn King, will be forced to trim the cost of money by the end of the year.

This week's ECB and Bank of England meetings came at a critical moment for the European economy as analysts attempt to assess the damage to growth caused by the global financial crisis, high inflation and the credit crunch.

Inflation speculation

With this in mind, Trichet is set to unveil on Thursday a new round of ECB growth and inflation forecasts for the 15-member euro zone as part of the bank's so-called staff projections.

But the question for financial markets is how far the ECB's hawkish 21-head rate-setting council is prepared to go in its tough anti-inflation rhetoric when euro zone states such as Spain, Italy and Ireland already appear to be on the brink of recession.

In the meantime, while some analysts believe that the ECB will be in no rush to trim rates, other analysts say slowing economic growth and signs that inflation has peaked will end up forcing the bank to cut the cost of money by the middle of the year.

However, while the economic mood in the euro zone darkened in August, a key survey released last month showed, the recent slide in oil prices resulted in a bigger-than-forecast drop in inflation in the 15-member currency bloc.

German industrial orders drop

Data released while the ECB's governing council was deliberating Thursday showed industrial order books in Germany, Europe's biggest economy, posting their eighth consecutive fall in July to drop by 1.7 percent. Analysts had forecast a modest 0.4-percent rise.

The European statistics office said last week annual inflation in the euro zone dropping more than expected to 3.8 percent in August from a record 4.0 percent in July indicating that consumer prices in the currency bloc might have peaked.

At the same time, oil prices have continued to pull back from record highs of around $150 a barrel in July dropping below $110.

Nevertheless, inflation in the euro zone still remains at almost double the ECB's annual inflation target of close to but under 2 percent.

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