Europe's rate-setters defy danger signs

The European Central Bank and the Bank of England yesterday dismissed portents of weaker growth and decided to leave interest rates unchanged.

Despite gloomy new forecasts from the European commission, the ECB kept rates in the 12-nation eurozone at 2.75% following last month's half-point reduction which was designed to boost activity.

The Bank of England's nine-strong monetary policy committee attracted criticism from employers groups and the TUC after pegging base rates in Britain at 4% for the 14th month in a row.

Brendan Barber, the TUC's general-secretary elect, said the MPC's no-change strategy was looking increasingly risky. "There is still no sign of a significant turnaround in manufacturing, investment or European export markets. A pre-emptive cut in interest rates is justified to ensure the UK's economic recovery remains on track."

Engineering Employers Federation chief economist Stephen Radley said the state of the world economy was hitting manufacturing and had put the UK economy "on amber".

He added: "With growing evidence of slowing consumer spending now removing one of the key barriers to cutting interest rates, it will be increasingly hard for the MPC to justify holding rates at their current level before the danger signals turn to red."

Speaking after the meeting of the ECB's governing council in Frankfurt, the bank's president, Wim Duisenberg, said he expected the eurozone economy to recover and inflation to fall back below its 2% ceiling this year. "We expect to see a slow resumption of growth through the year, including the first quarter."

The ECB's view contrasted with the latest projections from Brussels which expressed concern that, while its most optimistic projections showed the economy picking up 0.3% in the first three months of the year, its worst-case assessment pointed to economic contraction of 0.1%.

Adding to the gloom, official figures yesterday showed that unemployment in Germany, the eurozone's largest economy, had risen to almost 4.2m - its highest level for four-and-a-half years, with some analysts expecting it to hit 4.5m over the next few months.

That will put additional pressure on consumer confidence, already hit by higher taxes and public sector spending cuts, which was reflected in a sharp fall in retail sales figures issued this week.

The government in Berlin has acknowledged that it is reviewing its expectation of 1.5% growth this year, which is well above outside estimates such as that from the influential economic think-tank DIW which is forecasting 0.6%.

Mr Duisenberg said sluggish growth in the eurozone was helping to contain inflationary pressures, while the impact of a number of price increases early last year falling out of the inflation calculation and the appreciation of the euro would help.

But he warned that higher oil prices were putting upward pressure on the inflation rate.

He suggested that the ECB expected inflation, which is running at 2.2%, to fall back below the ECB's ceiling. "While the significant risks surrounding oil price developments make any short term prediction difficult at this stage, the most likely outcome remains that inflation will stabilise in the course of 2003 at a level below 2%."

Not every one is so sanguine. "The information on the eurozone economy in the past month has been disappointing and if we continue this pattern, there could be a genuine risk of a contraction in the first quarter," according to Mark Wall, European economist at Deutsche Bank in London.