Rate stays at 2% amid signs of recovery

THE European Central Bank left its benchmark interest rate at a half-century low of 2% amid signs the economy in the dozen euro nations may be recovering.

The euro economy should rebound after “subdued’ growth in the first half, the ECB has said. The bank will keep rates unchanged until “evidence of the recovery is firm by mid-2004”, the Organisation for Economic Co-operation and Development said last night.

“The ECB has done the utmost to boost growth,” said Olaf Wortmann, an economist at the Frankfurt-based VDMA machinery association, which represents 3,000 companies including carmaker DaimlerChrysler AG and steelmaker ThyssenKrupp AG.

“A slight improvement is in the cards in the second half,” he added.

Consumer confidence in Germany, Europe’s largest economy, advanced for a fifth month and French manufacturers became more optimistic for the first time this year. Europe’s Dow Jones Stoxx 50 Index has gained 27% since reaching a six-year low in March, amid indications of a US rebound and planned tax cuts in France and Germany.

Investors have scaled back expectations for another rate cut this year, interest rate futures trading shows. The yield on the three-month Euribor contract maturing in December was 2.02% at 2.38pm in Frankfurt, compared with 1.92% a month ago. The three-month money market rate is at 2.12%. Policy makers next meet to discuss interest rates on September 4.

The ECB’s benchmark rate remains a percentage point above the Federal Reserve’s overnight lending rate even though the world’s largest economy will likely outstrip Europe’s in the third quarter. The Bank of England cut its main rate to 3.5% on July 10, the lowest since 1955.

The ECB said it expects inflation in the euro region to fall below its 2% limit at the start of 2004, after hovering around that level for the remainder of this year. Inflation slowed to 1.9% in July, the European statistics office said yesterday.

In the US, destination of about a fifth of Europe’s exports, Federal Reserve chairman Alan Greenspan has said cheaper credit costs, higher stock prices and $330 billion in tax cuts will help bolster the economy.

France and Germany, are also planning tax cuts to revive their economies. French Prime Minister Jean-Pierre Raffarin has pledged “significant” reductions for next year. German Chancellor Gerhard Schroeder plans to accelerate income tax cuts worth €15bn to next year, on top of 6bn already announced.