Steady rates seen when ECB meets

4 May 2004

BERLIN – With nothing in a recent raft of economic indicators to challenge the European Central Bank’s assessment that the 12-member eurozone is on course to a modest recovery, analysts see the ECB as keeping rates on a hold when it meets Thursday.

Indeed, the build-up to Thursday’s meeting of the ECB’s 18-head rate setting council has been accompanied by a stream of comments from key officials indicating that the bank is doing what it thinks it does best: watching and waiting as it monitors the economic upswing that has been slowly taking shape in the eurozone.

“We’re keeping all options open,” declared ECB Vice President Lucas Papademos in a newspaper interview. He also insisted that the recent batch of data confirmed the bank’s prediction for a moderate eurozone recovery after a protracted period of stagnation.

Most economists believe that the bank’s rate setting cycle has now drawn to a close and that the ECB will leave its benchmark- refinancing rate at its historic low of 2 percent for the rest of the year before tightening monetary policy next year.

As a result, analysts are expecting this week’s ECB meeting to be essentially a “business as usual” gathering with Jean-Claude Trichet repeating the ECB mantra that the eurozone’s modest economic pickup remains in place at the press conference after the council’s meeting in Helsinki.

The ECB also wants to avoid market confusion surrounding last month’s meeting of its governing council when Trichet appeared to indicate that the Frankfurt-based bank might be warming to the idea of a rate cut to underpin household spending only to indicate later that the bank was in no rush to cut borrowing costs.

But faced with continuing high unemployment and the consequent failure of consumers in the eurozone to open their wallets and start spending, some analysts still believe that the ECB will trim rates again soon to shore up the bloc’s fragile recovery.

However, while retail sales in Germany fell in March and a European Commission report released last week showed consumer confidence in the eurozone stagnating, consumer confidence in the currency’s bloc’s second biggest economy, France rose in April, a survey released Tuesday showed.

Nevertheless, analysts expect growth in the eurozone to fall short of 2 percent this year with exports again emerging as the major pillar of the economy. For the moment, however, with the euro having retreated from the record highs of almost USD 1.30 it chalked up in January, the ECB is also likely to resist political pressure for a rate cut to ensure that the eurozone remains on a growth path.

Moreover, Germany’s apparent move to pull back from tough spending cuts to shore up the fragile recovery emerging in Europe’s biggest economy and to allow its budget deficit to swell is also likely to strengthen the ECB’s resolve against cutting borrowing costs.

While ministers insisted that Berlin has no plans to scrap its highly unpopular welfare and labour market reforms, the German government has decided to ignore strict fiscal rules for euro members and to allow the nation’s budget deficit to expand to spur economic growth.

While German Chancellor Schroeder described reports of a policy U- turn by the government as wrong saying Berlin had no intention of abandoning budget consolidation, a government spokesman said efforts to consolidate the budget should be done in a way which would not affect the German economy’s growth prospects.

Whatever the case, Trichet is likely to repeat warnings about eurozone governments abandoning the strict fiscal targets in the growth and stability pact when he briefs reporters after the meeting.

One new dilemma for the ECB, however, is likely to be the recent surge in energy prices on the back of a cut in output announced last month by OPEC with higher oil prices already starting to feed eurozone inflation rates.

Apart from the release of a series of economic sentiment reports, the ECB’s governing council members will be reminded of the current state of the eurozone economy with the release of key economic data in the lead-up to Thursday’s meeting.

This includes German unemployment, which is forecast to show the nation’s unemployment creeping up another 16,000 in seasonally adjusted terms in April. That said, however, German manufacturing order book data to be released Thursday is tipped to increase, indicating that the global economic upswing is starting to filter through to the world’s leading export nation.

DPA

Subject: German news