ECB leaves rates unchanged

The European Central Bank today left interest rates unchanged at 3.75% despite a growing clamour for action to boost confidence and help avert a global slump.

The ECB once again confounded expectations despite recent evidence that inflation was under control. Falling German and Italian inflation data this week had raised expectations that the ECB would cut rates for the second time since the September 11 attacks and recent comments by ECB decision makers in principle cleared the ground for such easing.

In past weeks, increasingly panicky European finance officials stepped up calls for the ECB to lower rates as growth estimates for the eurozone are pared back. But realising that such overt pressure could backfire, eurozone politicians muted their demands in the run-up to today's council meeting. Their softly-softly tactics, however, failed to move the Bank.

The ECB was heavily criticised for not cutting rates two weeks ago, prompting it to assert that it was independent in its policy decisions. Still, the ECB head, Wim Duisenberg, signalled last Friday that the bank stood ready to act if inflation was seen to be falling below its 2% target ceiling faster than expected. Recent data from Germany and Italy, which together make up almost half of the eurozone economy, did show inflation falling.

The ECB cut rates by a half-point on September 17 in its first ever move between regular meetings, in concert with the US Federal Reserve just after the September 11 attacks. But the ECB has been much less aggressive than the Fed, which has cut rates nine times by a total of 4% this year.

In contrast, the ECB lowered rates only three times this year, bringing rates down by 1%. Eurozone growth forecasts have been reduced in the wake of the September 11 attacks and some fear the eurozone faces recession due to a plunge in consumer and business confidence.

Germany's closely-watched Ifo business climate indicator plunged to a near eight-year low in September and the German finance minister, Hans Eichel, sharply lowered forecasts for growth in Europe's biggest economy this year and next. Mr Eichel said the economy would grow 0.75% this year, down from the previous official forecast for 2001 of 2%. And growth next year is expected to be between 1 and 1.5%, down from the previous target of 2.25%.

Yet the ECB's preoccupation with inflation at a time when recession appears as the greater threat has exasperated European finance officials.