European Central Bank Leaves Rates Alone

BRUSSELS, Belgium October 7, 2004; Paul Geitner writing for the AP reported that The European Central Bank left its key refinancing rate unchanged at 2 percent Thursday amid signs that the recovery in the 12-nation euro zone may be sputtering.

The decision by the bank's 18-member governing council -- making one of its twice-yearly forays outside its base in Frankfurt, Germany -- was widely expected by economists.

The ECB has left the rate untouched since a half-point cut in June 2003 as it waits for solid evidence that Europe's hesitant economic recovery firms up.

Although the bank bumped its economic growth forecast for 2004 up by 0.2 percentage points last month, recent purchasing and unemployment data suggest the recovery may be slowing down before it has a chance to become broad-based.

Record high oil prices would normally raise inflation concerns for ECB President Jean-Claude Trichet, but economists note that the generally poor labor market has kept them from stoking wage demands so far.

Trichet's comments at a meeting of G7 ministers in Washington also focused more on the risk to global growth than inflation. A slowing world economy would drag down Europe, where growth is heavily dependent on exports.

Trichet was to address the media later Thursday.

Some economists suggested Trichet could backtrack a bit from the optimism of a month ago, when he signaled the next rate move would be up, not down.

"It was certainly a case of the ECB seeing the glass half full whereas many in financial markets were seeing it half empty," said Julian Callow, chief European economist at Barclays Capital in London.

He said Trichet was likely to be "no more hawkish and if anything slightly more balanced, focusing on downside risks," meaning probably no rate hike for the rest of this year.

Despite continental Europe's recent recovery after three years of stagnation, naggingly high numbers of people remain out of work. The euro zone's jobless rate stood unchanged at 9 percent in August, far above other parts of the industrialized world such as the United States and Japan.

"The negative incidence of higher oil prices and lackluster employment growth will continue to hamper consumption growth in the months to come," the European Union's executive commission said in its quarterly report Wednesday.

According to a recent survey of purchasing mangers, growth in the dominant services sector during September was the slowest for 13 months as companies struggled to generate new business.