The European Central Bank kept interest rates at a six-year high today to fight inflation, even as the euro's appreciation and fallout from the U.S. housing slump curb economic growth.
The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent, as predicted by all 53 economists surveyed by Bloomberg News. The Bank of England kept its key rate unchanged at 5 percent after three cuts since December. The ECB won't lower borrowing costs before September, according to a separate survey.
With soaring food and energy prices pushing inflation above 3 percent in the 15-nation euro region, the ECB is reluctant to follow the U.S. Federal Reserve in cutting interest rates to shore up economic growth. The International Monetary Fund estimates expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 as the stronger euro hurts exports and the U.S. housing slump triggers a global slowdown.
"Recent data point to significantly lower growth in the second quarter, but the ECB is still in a wait-and-see mode,'' said Juergen Michels, an economist at Citigroup in London. "Before the ECB can cut its benchmark rate, inflation has to drop below 3 percent.''
ECB President Jean-Claude Trichet will hold a press conference in Athens at 2:30 p.m. Frankfurt time to explain the bank's decision. Policy makers meet outside Frankfurt twice a year.
Contrast With Fed
Euro-region consumer prices rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left interest rates unchanged since June last year.
By contrast, the Fed has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, attempting to fend off a recession. Federal Reserve Bank of Kansas City President Thomas Hoenig said May 6 that serious inflation pressures may compel the Fed to increase rates again.
The ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.
Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.
Inflation Risks
"Inflation could stay at an elevated level for a longer time than previously forecast,'' said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. "There's clearly a risk that the ECB will cut interest rates later than forecast and less aggressively.''
Policy makers including Axel Weber and Juergen Stark have said they're not sure rates are high enough to contain inflation.
"We'll monitor very closely all developments in the coming weeks and decide whether the current level of interest rates ensures we'll meet our objective'' of taming inflation, Weber said on April 21.
Since then, economic data have suggested Europe's economy is cooling. Executive and consumer confidence declined to the lowest level in more than two years in April and European retail sales dropped 1.6 percent in March from a year earlier, the most since at least 1995.
Exports from Germany, Europe's largest economy, unexpectedly fell for a second month in March, the country's statistics office said today.
Credit Squeeze
The IMF last month cut its global growth forecast and said the world economy faces a 25 percent chance of a recession.
The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year after the U.S. market for subprime mortgages, aimed at people with poor credit histories, collapsed. That has made banks reluctant to lend, pushing up the cost of credit and roiling financial markets.
Still, Trichet this week said there are indications that some markets are improving. The current level of ECB interest rates will contribute to achieving our objective, which is price stability,'' he said on April 24, indicating the ECB may keep rates unchanged.
Eonia swap contracts, a widely used market gauge of interest- rate expectations, rose as high as 3.99 percent this week from around 3.2 percent in mid-March.
"First signs are appearing that the worst of the global financial turmoil may soon be over,'' said Holger Schmieding, head of European economics at Bank of America Corp. in London. "For now, the ECB is firmly on hold.''
The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent, as predicted by all 53 economists surveyed by Bloomberg News. The Bank of England kept its key rate unchanged at 5 percent after three cuts since December. The ECB won't lower borrowing costs before September, according to a separate survey.
With soaring food and energy prices pushing inflation above 3 percent in the 15-nation euro region, the ECB is reluctant to follow the U.S. Federal Reserve in cutting interest rates to shore up economic growth. The International Monetary Fund estimates expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 as the stronger euro hurts exports and the U.S. housing slump triggers a global slowdown.
"Recent data point to significantly lower growth in the second quarter, but the ECB is still in a wait-and-see mode,'' said Juergen Michels, an economist at Citigroup in London. "Before the ECB can cut its benchmark rate, inflation has to drop below 3 percent.''
ECB President Jean-Claude Trichet will hold a press conference in Athens at 2:30 p.m. Frankfurt time to explain the bank's decision. Policy makers meet outside Frankfurt twice a year.
Contrast With Fed
Euro-region consumer prices rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left interest rates unchanged since June last year.
By contrast, the Fed has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, attempting to fend off a recession. Federal Reserve Bank of Kansas City President Thomas Hoenig said May 6 that serious inflation pressures may compel the Fed to increase rates again.
The ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.
Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.
Inflation Risks
"Inflation could stay at an elevated level for a longer time than previously forecast,'' said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. "There's clearly a risk that the ECB will cut interest rates later than forecast and less aggressively.''
Policy makers including Axel Weber and Juergen Stark have said they're not sure rates are high enough to contain inflation.
"We'll monitor very closely all developments in the coming weeks and decide whether the current level of interest rates ensures we'll meet our objective'' of taming inflation, Weber said on April 21.
Since then, economic data have suggested Europe's economy is cooling. Executive and consumer confidence declined to the lowest level in more than two years in April and European retail sales dropped 1.6 percent in March from a year earlier, the most since at least 1995.
Exports from Germany, Europe's largest economy, unexpectedly fell for a second month in March, the country's statistics office said today.
Credit Squeeze
The IMF last month cut its global growth forecast and said the world economy faces a 25 percent chance of a recession.
The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year after the U.S. market for subprime mortgages, aimed at people with poor credit histories, collapsed. That has made banks reluctant to lend, pushing up the cost of credit and roiling financial markets.
Still, Trichet this week said there are indications that some markets are improving. The current level of ECB interest rates will contribute to achieving our objective, which is price stability,'' he said on April 24, indicating the ECB may keep rates unchanged.
Eonia swap contracts, a widely used market gauge of interest- rate expectations, rose as high as 3.99 percent this week from around 3.2 percent in mid-March.
"First signs are appearing that the worst of the global financial turmoil may soon be over,'' said Holger Schmieding, head of European economics at Bank of America Corp. in London. "For now, the ECB is firmly on hold.''
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