FRANKFURT, Sept 4 - The European Central Bank on Thursday left interest rates unchanged at 2.00 percent as expected, given whiffs of recovery in the world's second largest economy. ECB policymakers stated clearly before the meeting they considered interest rates, effectively at zero after subtracting inflation, are stimulative enough to support a rebound. The decision came as little surprise to financial market analysts, who did not rule out more interest rate lowering later this year as an economic recovery still was not certain. "They will say they're encouraged by the better global growth prospects in the last few weeks, but they will have to admit some caution about the euro area," said Jose-Luis Alzola at Citigroup.
"They will remain cautious about the outlook for the euro area, so in that way they will not close the door to (further) rate cuts," he added. The ECB decision leaves the minimum bid rate on the main refinancing operations at 2.00 percent, a record low for the ECB and the lowest for the 12-nation euro area in at least 40 years after a 0.50 percentage rate cut in June. Financial markets barely moved after the decision with the euro trading at $1.0825, unchanged from before the announcement. ECB Vice President Lucas Papademos will hold a news conference at 1230 GMT to discuss the reasons behind the decision. ECB President Wim Duisenberg, who retires on October 31, is attending a meeting of former central bankers in Canada. Duisenberg's absence was seen as a strong signal by ECB watchers that rates would be left unchanged.
CLEAR SIGNAL TO HOLD
That view was reinforced by Bank of France Governor Jean-Claude Trichet, picked to replace Duisenberg, who wrote earlier this week that rates already are very low. "The fact that interest rates in the euro zone are at their lowest level for half a century...is not stressed enough," he said in written answers to members of the European Parliament. Moreover, inflation expectations are anchored around the ECB's desired level of 1.8 percent. This price stability provides every opportunity for the European economy to expand and jobs to be created, Trichet said. Likewise ECB Governing Council Member Ernst Welteke of Germany, in an interview published on Thursday, questioned what lower interest rates would achieve for the euro zone. "If we go in the direction of risking higher inflation rates in the future, there will be an increase in long-term rates immediately, and this will be counterproductive for the cycle," he said in Britain's Daily Mail on Thursday. Certainly some inflationary pressures have emerged since the ECB last cut rates. The euro has retreated from its record highs, oil prices are topping $30 a barrel and a summer drought is pushing up food prices.
Yet business and consumer confidence is turning around, the service sector is strengthening and spending plans picking up -- all fostering optimism about the outlook. At the same time, recovery is far from secure. Growth stagnated in the second quarter, with the euro zone's largest economies France and Germany in recession. Consumer spending remains very weak, job losses are mounting and the manufacturing sector is not yet on a solid footing.//