European Central Bank keeps interest rates unchanged in wake of euro cash launch

Thursday, January 3rd 2002, 12:00 am
By: News On 6

FRANKFURT, Germany (AP) _ With attention focused on the launch of euro cash, the European Central Bank left its key interest rate unchanged Thursday for the dozen countries using the new currency.

The decision by the bank's 18-member policy council was widely expected. The Frankfurt, Germany-based bank last cut its main refinancing rate Nov. 8, lowering it by a half percentage point to 3.25 percent.

Many expect it to reduce the cost of borrowing further in coming months, but recent comments from ECB President Wim Duisenberg suggest it will wait for more data on Europe's sluggish economy before moving again.

Moreover, the debate about interest rates has been overshadowed by the introduction of euro notes and coins that started Tuesday. Duisenberg planned a news conference on the progress of the massive logistical task ahead of his monthly briefing on monetary policy.

Nigel Anderson, an economist at RBS Financial Markets in London, said the decision is ``fully consistent'' with the signals the bank has been sending.

``I think perhaps people were hoping they would cut rates and help the economy out a bit, but nobody really expected them to,'' he said.

Michael Schubert, an economist at Commerzbank in Frankfurt, said central bank governors don't want to ``surprise markets'' while trying to create a calm environment for the euro.

Central bank governors arriving for Thursday's meeting all pronounced themselves satisfied with the changeover, reporting no major problems.

``This success proves the euro is really going to change Europe,'' said Portugal's Vitor Constancio.

Old currencies will be good for up to two months, depending on the country. But Holger Wenzel, head of the German Retailers Association, said he believes the German mark will be out of circulation by the end of next week.

``We will only trade and probably think in euros,'' he told German radio.

Amid reports the changeover in banks, stores and businesses was going smoothly, the euro traded at around 90 cents Thursday, after a sharp rise of 1.6 percent Wednesday. Schubert said it had recovered ground lost due to uncertainty over the transition.

``Now we see that nothing has happened, everything has gone well, and the euro has gone back up to where it was in the middle of December,'' Schubert said.

ECB officials and some economists say markets are still pricing the euro too low against the dollar, arguing that trade performance, interest rates and growth prospects speak in the currency's favor. The euro is still down by about 25 percent from its peak.

Some economists argue another interest rate cut would bolster euro by stimulating economic growth eroded by last year's global slowdown and the wave of layoffs that followed the Sept. 11 attacks.

The ECB cut rates only four times last year, compared to the 11 reductions by the Federal Reserve.

Duisenberg said before Christmas another cut could follow a more optimistic inflation forecast. No such forecast has been issued so far.

Lower oil prices have helped lower inflation in the countries using the euro to 2.1 percent in November, down from an eight-year high of 3.4 percent in May. Duisenberg has said he expects it to fall below the bank's target of 2 percent this year _ which could clear the way for lower rates down the road.

Economist Anderson forecast the bank would cut by a half percentage point sometime during the first quarter.