ECB holds rates at 2% as growth remains weak
The European Central Bank held its main refinancing rate at 2 per cent for the 23rd straight month last week.
The decision was widely expected with all economists forecasting that the ECB would leave rates unchanged.
While several members of the ECB’s governing council are believed to be keen to raise rates from their historic low at their first available opportunity, a run of weak economic data has so far prevented them from doing so.
Indeed there are signs that the language of a number of influential ECB members has actually softened in recent weeks, with Jean-Claude Trichet, the president of the ECB, Lucas Papademos, the vice president, and Axel Weber, the president of the Bundesbank, all stating that eurozone rate levels are “appropriate”.
Eurozone growth remains weak, with unemployment in the 12-nation bloc rising to 8.9 per cent in March. Forward-looking sentiment indicators have been weaker still, with Germany’s Ifo index of business sentiment sliding to a 19-month low.
This reading came just a day before Germany’s six leading economic institutes revised down their expectations for German growth in 2005 to just 0.7 per cent, from 1.5 per cent previously. The European Commission had previously downgraded its forecast for economic growth in the wider eurozone to 1.6 per cent in 2005, from 2 per cent, pinning the blame on high oil prices and a strong euro.
German consumer confidence has also fallen for the first time in eight months, while the eurozone-wide manufacturing purchasing managers’ index has fallen below the break-even 50-level, signalling contraction.
“The risks to real activity are clearly on the downside. There will be a ‘weak spot’ in the second quarter,” said Otmar Issing, the ECB’s chief economist.
Inflation remains under control with the flash estimate for the year to April unchanged at 2.1 per cent, a fraction above the ECB’s target level. Core inflation, which strips out energy costs, is softer still, at 1.6 per cent.
Although the weak economic picture has led some analysts to conclude that the ECB’s next move will be downwards, the majority of commentators still believe an eventual hike is a more likely outcome.
The remaining hawks also point to M3 money supply growth, the ECB’s gauge of future inflation, which has exceeded the bank’s reference value since May 2001.
The decision was widely expected with all economists forecasting that the ECB would leave rates unchanged.
While several members of the ECB’s governing council are believed to be keen to raise rates from their historic low at their first available opportunity, a run of weak economic data has so far prevented them from doing so.
Indeed there are signs that the language of a number of influential ECB members has actually softened in recent weeks, with Jean-Claude Trichet, the president of the ECB, Lucas Papademos, the vice president, and Axel Weber, the president of the Bundesbank, all stating that eurozone rate levels are “appropriate”.
Eurozone growth remains weak, with unemployment in the 12-nation bloc rising to 8.9 per cent in March. Forward-looking sentiment indicators have been weaker still, with Germany’s Ifo index of business sentiment sliding to a 19-month low.
This reading came just a day before Germany’s six leading economic institutes revised down their expectations for German growth in 2005 to just 0.7 per cent, from 1.5 per cent previously. The European Commission had previously downgraded its forecast for economic growth in the wider eurozone to 1.6 per cent in 2005, from 2 per cent, pinning the blame on high oil prices and a strong euro.
German consumer confidence has also fallen for the first time in eight months, while the eurozone-wide manufacturing purchasing managers’ index has fallen below the break-even 50-level, signalling contraction.
“The risks to real activity are clearly on the downside. There will be a ‘weak spot’ in the second quarter,” said Otmar Issing, the ECB’s chief economist.
Inflation remains under control with the flash estimate for the year to April unchanged at 2.1 per cent, a fraction above the ECB’s target level. Core inflation, which strips out energy costs, is softer still, at 1.6 per cent.
Although the weak economic picture has led some analysts to conclude that the ECB’s next move will be downwards, the majority of commentators still believe an eventual hike is a more likely outcome.
The remaining hawks also point to M3 money supply growth, the ECB’s gauge of future inflation, which has exceeded the bank’s reference value since May 2001.
May 9, 2005
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