ECB holds fire on rates

The European Central Bank today resisted growing calls to lower borrowing costs after the September 11 attacks on America and left interest rates at 3.75%.

Despite the rising clamour for lower rates in the eurozone, the ECB decided to hold fire to see how previous rate cuts were working their way through European economies.

The ECB last cut borrowing rates on September 17, when it acted in concert with the Fed to prevent chaos on the financial markets after the attacks on the World Trade Centre and the Pentagon.

Of the major central banks, the ECB and the Bank of England have lagged behind the Fed in cutting rates, citing worries about inflation.

In its most recent statements the ECB hinted that rates would remain the same.

At the G7 meeting of the seven leading industrialised countries in Washington last weekend, the ECB president, Wim Duisenberg, said interest rates at the moment were "consistent with maintaining price stability over the medium term".

He added that ECB expected eurozone growth to pick up at the end of the year.

Other ECB officials also indicated that the bank was in no hurry to reduce rates.

ECB board member, Sirkka Hamalainen, said the bank was inclined to take its time to assess the impact of its past interest rate cuts after slashing borrowing costs by 75 basis points since the end of August.

But signs are accumulating of a European slowdown although the eurozone remains more buoyant than the US.

On Tuesday, the European economic and monetary affairs commissioner, Pedro Solbes, warned that Europe may not rebound until next year.

He also said growth in the 15-member EU was set to come in well below the EU's previous 2% forecast.

There are also worrying signs from Germany, Europe's most powerful economy.

Berlin warned that unemployment would be higher than earlier estimates.

The figures did not yet reflect the impact of the September 11 attacks but dozens of top companies have announced further job cuts, on top of the lay-offs planned earlier in response to the global economic slowdown.

Eurozone business surveys released last week showed that even without the impact of the attacks fully taken into account, business sentiment has been deteriorating at record pace.

On the other hand, inflation, after consistently topping the ECB's 2% target, was now set to return below that level sooner than earlier assumed, giving leeway to lower interest rates.

The ECB's decision is bound to trigger criticism that it is too obsessed with inflation even though that threat is receding at a time when the world economy is slowing down dramatically.