ECB ignores case for cut

The European Central Bank yesterday shrugged off evidence of a worse than expected slowdown in the global economy and kept interest rates in the 12-nation zone unchanged at 4.5%.

Although Bank of England fears about the darkening outlook for the world economy prompted a surprise cut in British interest rates yesterday, the ECB declined the opportunity to join global efforts to boost flagging growth.

Its decision came despite data which showed economic confidence in Europe continuing to collapse and a further fall in US manufacturing orders as American industry struggles to climb out of recession.

The ECB has cut interest rates once this year , compared with six cuts by the US Federal Reserve and four by the Bank of England's monetary policy committee.

"Compared with the activist policies of the MPC and the US Fed, where the real economy is more of a priority, the ECB is starkly isolated," said Nigel Anderson at RBS Financial Markets.

Survey evidence from the European commission yesterday showed industrial and consumer confidence in Europe falling last month as more and more companies such as Siemens, ABB and Alcatel announced hefty job cuts.

In Germany, retailers are forecasting stagnant sales this year while the German chamber of commerce expects the economy to grow by between 1% and 2%. In France, the latest evidence showed consumer confidence at its lowest level for two years.

"Economic fundamentals and developments, and certainly those for the last couple of weeks, tell us it is high time for the ECB to move," said Adolf Rosenstock, an economist at Nomura.

However, analysts believe the bank will have to use the four-week break before the next meeting of its interest rate-setting governing council to prepare financial markets for a cut - and the reasoning behind such a move - or the ECB will risk damaging its credibility as it did with its only previous reduction in borrowing costs this year, when it cut rates to 4.5% in May.

The Bank of England's decision to cut rates by 0.25 percentage points to 5% took financial markets by surprise and pushed sterling down by half a cent to $1.43 against the dollar. The euro ended the day little changed at $0.8830.

Analysts had expected worries about inflation, including a buoyant housing sector and an increased appetite for credit, to persuade the committee to keep rates on hold.

Although the general view is that yesterday's reduction in UK borrowing costs is likely to be the last in the current cycle and rates could start nudging up again next year, some analysts believe that the weakness in the global economy - cited by the MPC as the reason for yesterday's move - could force further downward action.

"We see continued weakness in the global environment and a further impact on the UK. The weakness we have seen on the industrial side so far will spread into other areas of the domestic economy," said Jonathon Loynes at Capital Economics.

Darren Winder at UBS Warburg said he was surprised the MPC had decided to cut rates. "The risk is that the domestic economy is perhaps stronger than the MPC realises and that the international economy improves sooner than anticipated."

But he noted that the MPC would be able to move swiftly to raise rates if the upturn came through more rapidly than expected.