ECB holds interest rates for 24th month as Trichet denies talk of euro's demise

The European Central Bank refused again yesterday to cut interest rates to boost the flagging eurozone economy, leaving its key repo rate at 2% for the 24th month in a row.

However, economists said the increasing stagnation of the bloc's economy, which is only expected to grow by about 1.5% this year, may push the Frankfurt-based ECB into a rate cut later this year. The euro fell sharply this week as markets fretted that the no votes in France and the Netherlands on the EU constitution could derail reforms across Europe.

Yesterday, in the wake of the Dutch vote, the euro hit an eight-month low against the dollar of $1.216, then recovered slightly to $1.226, but it remains nearly 10% down this year. Against the pound the euro traded down at 67.5p.

The ECB insists that cheaper money will not cure Europe's economic problems and says eurozone politicians must push through reforms to labour, product and capital markets to boost growth.

Yesterday, however, there were signs that this stance may be softening. At a press conference after the "no change" decision was announced, Jean-Claude Trichet, the ECB president, refused to say whether the ECB governing council had discussed a rate cut at its meeting but did not say, as he had in April and May, that a cut was not an option.

Howard Archer, an economist at Global Insight, said: "This reinforces our long-held view that the next move in interest rates will be down. There is a significantly growing chance that this will happen before the end of this year."

Others were less sure, however, arguing that inflation was still at the ECB's ceiling of 2% and that it would take a major financial catastrophe for the bank to opt for a cut.

Rob Carnell, at ING Barings, said: "It really does not sound as if the ECB is on the verge of cutting rates. We do not expect them to."

Mr Trichet repeated his criticism that leaders were failing to carry out much-needed reforms and urged consumers to spend more and firms to invest.

He also dismissed as "nonsense" a report that the Bundesbank chief, Axel Weber, and Germany's finance minister, Hans Eichel, had discussed the break up of the euro. He added that talk of the break up of the single currency was as believable as California dumping the dollar.

But Stuart Thomson, an economist at stockbrokers Charles Stanley Sutherlands, claims in a research paper that the demise of the euro is inevitable by 2020 in the wake of the no votes and predicted that the first country may leave the euro by 2008.

"The importance of the referendum results is their implications for the longer term. Monetary union - without the political union that the referendum was designed to move Europe towards - is unsustainable in the long run," he said.