ECB puts interest rates on hold

THE European Central Bank (ECB) left interest rates unchanged yesterday, resisting calls for a cut to ease pressure on exporters suffering from the euro’s current strength.

Most commentators’ predictions were proved right as rates stayed at their historic low of 2% for the eighth month in a row.

Meanwhile, The Bank of England raised its benchmark interest rate by a quarter point to 4%, the second increase in four months, on concerns that stronger economic growth in Britain and a global recovery may trigger higher inflation.

ECB president Jean-Claude Trichet said the bank remained concerned about the euro’s sharp appreciation against the dollar, but that the economic recovery in the euro area would be in line with expectations.

Economic growth in the eurozone’s major trading partners would support foreign demand for EU-produced goods and services, but the strong euro would continue to hurt price competitiveness and dampen export growth, according to Mr Trichet. Mr Trichet also said the exchange rate would help keep inflation below 2% as a result of cheaper imports.

Data released earlier this week suggested improving economic conditions and confidence across the eurozone, fuelling expectations that rates would be left unchanged. Observers felt the ECB and European governments would instead use this weekend’s G7 summit of the world’s leading economic powers to put pressure on the US to halt the slide in the dollar’s value.

This would be more effective than using a rate cut as a short-term attempt to cap the euro’s advance against the American currency.

In a veiled reference to the controversial American policy of running a large budget deficit, the ECB said “persistent imbalances in some regions of the world” had the potential to harm global economic growth. The bank said sustainable economic policies and structural reforms were necessary to improve global trading conditions.

The American budget deficit now stands at 5% of Gross Domestic Product (GDP), while eurozone countries are prohibited from running deficits higher than 3% of GDP. Ireland’s budget deficit is just 0.1%.

The decision to hold rates steady was expected to result in a slight weakening of the euro against sterling, following the 0.25% increase in British interest rates yesterday. Investors were expected to switch towards sterling-denominated assets, which became more attractive following yesterday’s developments.

IIB Bank economist Austin Hughes said the ECB’s assessment of the economic climate was more upbeat than expected. This should dampen hopes of a further rate cut in the short term, said Mr Hughes, adding that the next interest rate movement would be upward.