Frankfurt, April 26 (Bloomberg) -- The European Central Bank kept its benchmark interestrate at 4.75 percent as inflation in the dozen countries that share the euro shows no signof receding in the next few months. ECB President Wim Duisenberg faces the dilemma of rising prices and slowing growth.The European Union yesterday reduced its euro-area growth forecast for this year andcompanies such as Siemens AG and Moulinex SA are firing workers. The bank won'thelp because prices are rising too fast. ``Time's running out for the ECB,'' said Joerg Kraemer, economist at Invesco AssetManagement in Frankfurt. ``I thought the worsening economy would force them to lowerrates even though they never wanted to do that.'' Inflation has exceeded the ECB's 2 percent ceiling for 10 months, and may do so again incoming months. German consumers paid more for goods and services in April, figuresreleased today showed. Prices in Europe's largest economy rose at an annual rate of 2.8 percent from 2.5 percentin March. In Italy, consumer prices gained 3.1 percent in April, more than expected,figures from a dozen cities showed. In March, the euro-area inflation was 2.6 percent.
G-7 Meeting
The ECB is the only major central bank not to reduce borrowing costs this year. By doingnothing, the bank courts confrontation with the U.S. when officials from the Group ofSeven major industrial nations meet in Washington this weekend. U.S. Treasury Secretary Paul O'Neill said last week he is ``mystified'' by the economicoptimism of European officials. The International Monetary Fund, which sees euro-zonegrowth slowing to 2.4 percent this year, said a ``moderate'' rate reduction is``appropriate.'' Duisenberg hasn't lowered rates for two years. The U.S. Federal Reserve has reducedrates four times since January. The Bank of England and the Bank of Japan havefollowed. Unlike the Fed -- which also has a mandate to boost employment -- the ECB's chief goalis inflation. The risk is that by standing pat, growth in Europe will disappoint. ``In a world where markets evolve quickly, they have to learn how to anticipate,'' Jean-Marie Messier, chairman of Vivendi Universal SA, told French radio station RTL. ``TheECB should have already acted.'' For the first time, the ECB's main rate is higher than the Federal funds rate, now at 4.5percent. The euro rose to as high as 90.28 U.S. cents after the rate decision, comparedwith 89.60 before the announcement.
`Big Mistake'
The ECB should follow the Fed, said Juergen Peters, deputy chairman of Germany's IGMetall engineering and metals workers union. A cut is ``urgently needed'' in the euro areato spur the economy, he said. European companies will see exports increase at a slower pace as U.S. growth could beas little as 1.5 percent this year, according to International Monetary Fund ChiefEconomist Michael Mussa. ``It's a big mistake that the ECB hasn't followed the U.S.,'' said Michael Groeller, chiefexecutive of Mayr-Melnhof Karton AG, Europe's largest maker of recycled carton board.``We are trying to tackle a reduction in order intake by reducing production.' Slowing growth in Europe is particularly evident in Germany, where companies were morepessimistic in March than at any time in the past 20 months and unemployment rose fora third month in a row. ``Our U.S. customers are very hesitant about buying at the moment or they arepostponing certain projects,'' said Peter Rau, chief financial officer at Ixos Software AG.U.S. sales fell 19 percent in the third quarter, the company said.
European Economies
German growth will slow to 2.1 percent from 3 percent last year, the six leading state-backed research institutes said two weeks ago. Siemens said today it will cut 3,500more jobs after second-quarter profit fell 11 percent. Earlier this month, the company hadsaid it will sack 2,000 workers making mobile phones. Business confidence is also sliding in France and Italy, which together with Germanymake up about three-quarters of the euro-zone economy. France's Schneider ElectricSA, the biggest maker of low-voltage electrical equipment, forecast slowing sales growththis year as demand in the U.S. drops. Scania AB, the third-largest maker of heavy trucks, will cut 1,200 jobs in Europe afterfirst-quarter profit fell 13 percent and Western European sales declined. And Moulinexsaid it will cut 4,000 jobs and close four European factories to trim costs. Even so, there are some signs EU countries are weathering the global slowdown. Frenchconsumer spending rose in March for the fourth time in six months. The gain in spendingwas almost three times that predicted by economists. Euro-area industrial productionunexpectedly rose in February. The European Commission, while revising down its forecast for euro area growth,yesterday said the effects of the global slowdown on the European economy be limitedthanks to resilient domestic demand. ``Monetary conditions remain conducive to growth,''the Commission said.
Money Supply
Ernst Welteke, president of the Bundesbank, said in a newspaper interview that interestrates are ``not an instrument for boosting growth.'' The ECB, unlike the Fed, cannot pointto flagging economic growth to justify its decisions because of its mandate to keep pricesunder control. Some economists say a slowdown in M3 money supply would make it easier for the ECBto lower interest rates even as inflation continues to exceed its ceiling. The ECB monitorsM3 as it says too much money chasing too few goods drives up inflation. M3 growth is expected to slow to 4.5 percent in March. This would be the first time theECB reaches its target of 4.5 percent M3 expansion. ``Current interest rates will prove too high'' to keep M3 expansion near the ECB's target,or reference value, of 4.5 percent, said Thorsten Polleit, an economist at Barclays Capitalin Frankfurt.
Next ECB Meeting
The ECB in its April monthly bulletin said upward risks to price stability from monetarydevelopments have ``diminished.'' Of 32 economists and investors polled by Bloomberg News, 15 foresee a rate cut in May,10 expect a reduction in borrowing costs in June and 5 forecast a cut in the third quarter.One expected a move today and another sees no rate cut this year. Policy makers nextmeet May 10. Investors currently price in a cut in interest rates of at least 25 basis points bySeptember. The implied yield on September Euribor interest-rate futures contracts was at4.44 percent, 31 basis points below the current benchmark rate.