ECB Leaves Interest Rates Unchanged

The European Central Bank kept interest rates unchanged after four reductions since early October as officials gauge the severity of the recession before cutting borrowing costs again., Bloomberg 2/5/2009 5:26:59 AM

Policy makers meeting in Frankfurt left the benchmark lending rate at 2 percent. ECB President Jean-Claude Trichet has signaled a reluctance to follow the U.S. Federal Reserve in lowering rates to close to zero, even as Europe finds itself in the grips of its worst recession since World War II. At the same time, Trichet signaled as recently as Jan. 28 that the slowdown will probably force the ECB to act again next month.

While the ECB has chopped 2.25 percentage points off its benchmark, the most aggressive easing in the bank’s 10-year history, it still has the highest rates among the Group of Seven industrialized nations.

Trichet said last week that the ECB’s next important” meeting will be in March, suggesting it may resume cutting rates once it has its new quarterly economic projections. That wait-and- see approach is opening the ECB to criticism that it’s not acting fast enough to protect its economy.

Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook fell to a record low. Spain’s industrial production plunged by 19.6 percent in December and in Germany, Europe’s largest economy, factory orders extended their worst slump on record.

The International Monetary Fund predicts the economy of the 16 euro nations will contract 2 percent this year.

Inflation, which the ECB aims to keep just below 2 percent, is also slowing rapidly. The rate dropped to 1.1 percent in January, the lowest since July 1999 and down from a 16-year high of 4 percent just seven months ago.

While ECB officials have said inflation may approach zero later this year, they expect it to pick up in the second half and have dismissed the risk of deflation.

ECB Leaves Interest Rates Unchanged