ECB Keeps Interest Rates Steady

FRANKFURT, Germany (AP) â€” Confident in a climbing euro, the European Central Bank kept its key interest rates unchanged as economic growth showed signs of slowing. <br><br>The euro topped 87 U.S. cents

Thursday, November 30th 2000, 12:00 am

By: News On 6

FRANKFURT, Germany (AP) â€” Confident in a climbing euro, the European Central Bank kept its key interest rates unchanged as economic growth showed signs of slowing.

The euro topped 87 U.S. cents for the first time this month â€” initially getting a lift from weak U.S. economic figures, then taking another upturn when investors saw that expansion-minded European firms won't face higher borrowing costs for now.

Most analysts had expected the Frankfurt-based central bank to hold its benchmark interest rate steady at 4.75 percent after having already boosted it six times this year to cool inflation. And many predict no further increases before New Year's.

Analysts had warned that another increase in interest rates, which makes it more expensive for firms to fund expansion, could hamstring the economy.

``It seems we are past the rate peak of the year,'' said Thorsten Polleit, chief euro analyst at Barclays Capital. ``Financial markets have been much more concerned about future economic growth then they were a few months ago.''

The ECB adjusts interest rates in a bid to keep inflation under a 2 percent ceiling in the 11 European Union nations using the region's common currency, the euro.

Inflation in the region peaked at a six-year high of 2.8 percent in September, but a rash of poor economic data suggested another hike could jeopardize the economy.

Just last week, the European Union forecast economic growth for the region would slow to 3.1 percent next year after reaching 3.4 percent this year, its highest level since 1989. That's still considerably behind the EU's figures for the United States, which chart 5.1 percent growth this year and 3.3 percent next year.

And German figures released Monday showed sluggish consumer spending is sapping strength from the region's biggest economy. Germany economic growth slowed to an annual rate of 2.8 percent in the third quarter from 3.3 percent in the second quarter.

Investors largely expected the ECB to stay its hand, and stock markets barely flinched after the announcement, remaining down across Europe.

The euro already recovered from the 84 cent range last week, and spent most of the afternoon flirting with the 87-cent level. Those gains also helped ease the pressure for an interest rate hike. In afternoon trading in New York, the euro was worth 87.25 cents.

Higher interest rates can boost a currency by increasing the payback on bonds denominated in it. But earlier ECB rate hikes have failed to halt the slide of the euro, which has dropped about 15 percent against the dollar this year, and the ECB has increasingly turned to market intervention to halt the rout.

Central bankers have bought euros five times this year on international currency markets in an effort to buoy the euro's value, the latest intervention coming Nov. 9.

ECB President Wim Duisenberg has said the rounds of interventions were meant to ``break the back of a one-way psychology'' that held the euro in a continuous downward spiral.

Paired with weakened economic data from the United States, the threat of future interventions could push the euro as high as 90 cents by New Year, said Neil Parker, an economist with the Royal Bank of Scotland.

Signs of a so-called hard landing in the U.S. economy could convince more people that investing in Europe is a good deal.

``There is real concern that the U.S. economy is slowing substantially and won't get a bounce back in the fourth quarter,'' Parker said. ``So investors are willing to give the euro a bit of a break.''

On Wednesday, the U.S. Commerce Department announced its economy grew just 2.4 percent over the summer, the slowest pace in four years, and considerably below a sizzling 5.6 percent rate posted during the second quarter.