ECB leaves rates at 2%

The European Central Bank (ECB) today kept interest rates unchanged at 2% despite widespread calls for lower borrowing costs to spur economic activity.

Jean-Claude Trichet, the ECB president, said there was some short-term uncertainty in the economy, notably regarding production and consumer demand, but not enough to derail a European recovery.

"On balance, there is currently no evidence challenging the assessment of continued, though modest, real GDP growth over the short term," Mr Trichet told a news conference.

Before today's decision, there was speculation that the ECB might lower rates as Mr Trichet last week spoke of a review of policy if consumer prospects failed to recover. But an upbeat reading of manufacturing in the eurozone and improving French consumer confidence data released this morning may have hardened sentiment against a rate cut.

The ECB has held rates steady for 10 months in a row despite feeble growth in the eurozone - just 0.4% in 2003. The euro economies did begin to show signs of life late last year led by global exports, although recent data from Germany, the eurozone's largest economy, indicated that recovery may be stalling.

In his comments today, Mr Trichet reiterated the ECB's main concern - price stability, a policy that has won the bank few friends among European governments and industrialists.

"We have, I would say, an analysis of the balance of risks to inflation, to price stability, which leads us to the conclusion that the present level of interest rates is the kind of level which ensures price stability. Let us not forget that the magnetic north ... is price stability. And it's always this balance of risks that we are weighing," Mr Trichet said.

Today's decision will come as a bitter pill for those who had been calling for a looser monetary policy.

EuroCommerce, a trade association representing the retail, wholesale and international trade sectors in Europe, yesterday pleaded for lower borrowing costs to encourage consumption and investment.

In Germany, which is mired in low growth and high unemployment, the industry association BDI this week called for a half percentage point rate cut, and the head of Germany's influential Ifo economic institute also asked for lower rates.

"Trichet is not as dovish as the market expected. Against a background of stronger PMI [manufacturing] data this morning, the market is now questioning how much scope the ECB has to cut rates in the future," Michael Klawitter, a senior currency strategist at WestLB, told Reuters.