ECB holds interest rates

The European Central Bank today held interest rates steady but signalled its readiness to cut the cost of borrowing because of increasing risks to growth.

Wim Duisenberg, the president of the ECB, justified the decision by saying that the overall outlook for inflation and growth had not changed since December's half-point cut. But Mr Duisenberg added that uncertainty over growth had intensified.

"The risks to the downside have somewhat increased," he said. "We had hoped that this uncertainty would gradually disappear, but it is still prevailing and permeates and pervades the minds of consumers and investors alike."

Eurozone borrowing costs of 2.75% are at their lowest level in more than three years following the surprisingly steep half percentage point cut in December.

"We do see both upwards and downwards risks to inflation," Mr Duisenberg said. "The lack of certainty, the lack of confidence and the slow movement of economic activity are helping to keep inflation down.

"Oil prices are doing the opposite. In the current circumstances, our attitude is that we regard this policy stance as appropriate."

Analysts took Mr Duisenberg's use of the word "appropriate" as a signal that interest rates will stay unchanged for the next few months before heading lower.

"This would be consistent with our view that the ECB will next lower interest rates in the second quarter," said Julian Callow, of Credit Suisse First Boston, in a research note.

"Given that rates are already at such low levels, a further rate reduction would require hard evidence that inflation really was well below 2%, but we would anticipate that this would become evident in published data by May."

The ECB forecasts that growth will revive to a modest 1.1% to 2.1% range in 2003 after cuts in interest rate over the past two years. Inflation is also expected to ease and may even slip below the ECB's 2% ceiling this year.

But those ECB estimates were based on November data before a batch of grim economic news.

Manufacturing shrank in December, for the fourth month running, and the service sector stalled. Consumer sentiment also has weakened and the job outlook is worsening, threatening to undermine weak retail sales.