ECB Leaves Rate at 4% as Euro Threatens Growth


The European Central Bank left interest rates unchanged today as the rising euro and a U.S. housing slump threatened to curb economic growth.

Policy makers meeting in Vienna kept the benchmark refinancing rate at 4 percent, as predicted by all but one of 55 economists in a Bloomberg News survey. The bank will wait until April to raise the rate to 4.25 percent, a separate survey shows.

The ECB shelved a planned rate increase last month after defaults on U.S. subprime mortgages roiled world financial markets and pushed up credit costs. The euro's climb to a record against the dollar has also clouded the outlook for European exports. Policy makers are still concerned inflation will accelerate: Last month, consumer-price increases breached the bank's 2 percent ceiling for the first time in more than a year.

``The ECB finds itself in a dilemma,'' said Aurelio Maccario, an economist at UniCredit Markets & Investment Banking in Milan. ``On one hand, the strong euro and rising credit costs have already tightened conditions. On the other, it's facing accelerating inflation.''

ECB President Jean-Claude Trichet will hold a press conference at 2:30 p.m. to explain today's decision. Separately, the Bank of England left its benchmark rate at 5.75 percent.

``I could imagine a change in tone,'' said Michael Heise, chief economist at Dresdner Bank AG in Frankfurt. ``Trichet said at the last meeting that rates are still on the accommodative side. There are enough reasons'' to alter that assessment.

Slowing Growth

Europe's economy is showing signs of slowing. Service industries from insurers to airlines grew at the weakest pace in two years in September and confidence among consumers and executives in the economic outlook dropped to a 16-month low.

The ECB last month forecast that growth will moderate to about 2.3 percent in 2008 from 2.5 percent in 2007. Last year the economy expanded 2.8 percent, the fastest pace in six years.

Rising defaults on U.S. mortgages aimed at people with a poor credit history have made banks reluctant to lend, pushing up borrowing costs around the world. While the ECB has held seven special money auctions since markets seized up on Aug. 9, the Euribor rate for three-month funds was fixed at 4.78 percent today, close to a six-year high.

Rising credit costs may slow Europe's economic growth by 0.3 percentage point next year, the European Commission said today.

Belgian Finance Minister Didier Reynders said in an interview with Les Echos published yesterday that the ECB should consider cutting rates if economic growth slows.

The U.S. Federal Reserve on Sept. 18 lowered its benchmark rate by half a point to 4.75 percent to prevent the housing slump from dragging the U.S. economy into recession. That helped the euro rally to a record $1.4283 on Oct. 1.

`Pain Threshold'

Politicians including Italian Prime Minister Romano Prodi and his Luxembourg counterpart Jean-Claude Juncker have expressed concern that the soaring currency will curb economic expansion by making exports more expensive.

Germany's Economy Minister Michael Glos said today Europe's largest economy ``has broadly managed to cope'' with the strength of the euro, ``but I can see the pain threshold being reached.''

Signs of discord have emerged among ECB council members over the significance of the euro's gain for monetary policy. Greece's Nicholas Garganas said in a Sept. 24 interview the stronger euro won't damp inflation. Three days earlier his Portuguese colleague Vitor Constancio said the currency's move will ease pricing pressures.

Uncertainty over the economic outlook ``is leading to a more controversial debate on the governing council,'' said Elga Bartsch, an economist at Morgan Stanley & Co. in London.

No Cut in Sight

Still, ECB policy makers haven't signaled they want to follow the Fed's example and cut rates. Trichet said Oct. 1 the ``euro area has become more resilient to external developments'' and Vice President Lucas Papademos said l...


Bloomberg
10/4/2007 7:01:43 AM