Frankfurt, May 23 (Bloomberg) -- The European Central Bank kept its benchmark interest rate unchanged at 4.5 percent amid new signs of accelerating inflation, even as growth slows. The ECB is under pressure to reduce the cost of money as growth slows. The German and French economies -- which account for about half the region's production -- expanded slower than expected in the first quarter, reports today showed. At the same time, rising prices are a dilemma for the ECB. The central bank says it wants to keep inflation below 2 percent, a goal it has missed for 11 months. Preliminary figures today from Germany suggest European inflation may accelerate in May. ``The outlook for near-term rate cuts has become much cloudier because of the ugly German inflation numbers,'' said Julian Callow, chief continental European Economist at Credit Suisse First Boston in London. ``It looks doubtful the ECB will cut again until well into the third quarter.'' German inflation rose to the highest level in over seven years in May, a report showed today. And the cost of Italian consumer goods rose more than expected in May, numbers from 11 cities published yesterday showed.
Money Supply
None of the 19 economists surveyed by Bloomberg News expected a rate reduction today. The ECB lowered the borrowing costs for the first time in two years on May 10, when it cut the key rate a quarter point. The euro was little changed after the rate decision was announced at 85.89 U.S. cents, compared with 85.88 beforehand. The currency earlier fell to the lowest in more than six months. ECB policy makers next meet on June 7. The yield on the 3- month Euribor interest rate futures contract was 4.34 percent, 16 basis points less than the ECB's rate. The central bank has given itself room to reduce rates again, analysts said. In its last monthly report, the ECB said money supply has expanded less than reported this year. M3 growth in March may have been about 1 percentage point less than the three- month average of 4.8 percent published on April 30. ``M3 growth below 4 percent threatens to act as a drag on growth,'' said Holger Fahrinkrug, an economist at UBS Warburg in Frankfurt. ``We expect further rate cuts, probably in July and again in the third or fourth quarter.'' Policy makers have said they consider money supply growth of more than 4.5 percent likely to fuel inflation.
Slowing Growth
The Organization for Economic Cooperation and Development reduced its 2001 growth forecast for the 12 countries using the euro to 2.6 percent, less than the European Commission's prediction of 2.8 percent growth. France, the second largest economy in the region, grew at the slowest pace in more than two years in the first quarter as faltering world growth took a toll on exports and investment, a report showed today. Consumer spending fell a greater-than- expected 0.8 percent in April. Growth is expected to be slowest in Germany, whose economy accounts for about a third of the region sharing the euro. Gross domestic product gained 0.4 percent in the first quarter, less than the 0.5 percent gain analysts had forecast. The economy expanded 1.6 percent from a year ago, the slowest pace in a year and a half.
Pessimism
Confidence among German companies declined a tenth time in 11 months in April, the Ifo survey of German executives showed yesterday. Reports over the past two weeks showed factory orders and industrial production falling, and unemployment rising. ``The index will likely reach a bottom next month, maybe there'll be another small decline,'' said Volker Nitsch, economist at Bankgesellschaft Berlin AG. ``The ECB will adjust rates once more and that will have been it.'' German growth is also being crimped by a weak building industry and low consumer spending. Construction orders and retail sales both declined in March. Philipp Holzmann AG, the German builder that almost went bankrupt in 1999, said it may cut even more jobs than planned as orders decline.