The European Central Bank will probably keep its benchmark lending rate at 2 percent, ignoring calls from politicians including German Chancellor Gerhard Schroeder to bolster an economic recovery threatened by the euro's climb, a survey of economists showed. The ECB will keep the refinancing rate at the lowest level since at least 1946 and twice the rate charged by the U.S. Federal Reserve, said all 35 economists surveyed by Bloomberg News. The Bank of England left its rate at 4 percent today.
Schroeder and French Prime Minister Jean-Pierre Raffarin are piling pressure on the ECB to cut rates as inflation eases, the euro's 11 percent appreciation against the dollar in the past six months hurts exports and unemployment saps consumers' willingness to spend. ECB President Jean-Claude Trichet may want more evidence of faltering growth before giving in to the demands. ``A cut won't come this week because of the calls by Schroeder and Raffarin,'' said David Brown, chief European economist at Bear Stearns International in London. Still, ``I have backtracked on my `no more rate cuts' view. The April meeting could become very interesting.''
The ECB's decision is scheduled for 1:45 p.m. in Frankfurt.
`Open-Minded'
With inflation slowing below the ECB's 2 percent limit this year, Trichet may signal a willingness to consider rate cuts later this year at today's press conference, scheduled to start at 2:30 p.m., said Martin Hochstein, who helps manage about $4.6 billion at SEB Investment-Fonds GmbH in Frankfurt. ``The ECB needs to prepare the market over a period of four weeks'' for any rate cut, said Hochstein. ``Maybe the most we can expect from the ECB is to signal a more open-minded approach'' to changing interest rates. Economic reports in the past week have suggested the stronger euro is holding back Europe's recovery. Growth in the dozen-nation euro region eased to 0.3 percent in the fourth quarter from 0.4 percent in the third, the European Union statistics office said. In Germany, Europe's largest economy, business confidence dropped for the first month in ten and unemployment climbed in February. Factory orders unexpectedly dropped a month earlier, a report from the German government showed today. The current exchange rates ``clearly penalize European companies,'' Bernard Arnault, chairman of luxury goods maker LVMH Moet Hennessy Louis Vuitton SA, said yesterday. ``The ECB should take that into account by lowering interest rates.''
`Negative Impulse'
Europe's economy is relying on exports to spur growth as consumers keep a rein on spending at a time when unemployment stays at a four-year high. The number of jobless people in Germany rose a seasonally adjusted 26,000 in February, the Nuremberg-based Federal Labor Agency said today. French consumer confidence fell and Italians were the most pessimistic in a decade in February. ``The negative impulse to the economy is clearly coming from the consumer side -- sentiment is still very, very weak,'' said Carsten Klude, head of strategy at Hamburg-based M.M. Warburg, which manages the equivalent of about $19 billion. ``I can't imagine a rate cut would help.'' Trichet told European lawmakers last month he expects the euro's appreciation to support disposable income and consumer spending, helping offset the currency's impact on exports. With inflation under control, Trichet doesn't need to shift rates to keep a lid on consumer price. The euro region's inflation rate fell below the ECB's 2 percent limit in January and tumbled to 1.6 percent last month.
Gradual Recovery
For now, the ECB is showing no signs it plans to lower borrowing costs. Trichet has said the bank still expects economic growth to accelerate gradually. It us up to governments to boost growth by easing labor and market regulations and lowering budget deficits, according to Trichet. Bolstering the case to keep rates unchanged, the euro has weakened against the dollar in the past two weeks. Europe's single currency, which rose to a record $1.2930 on Feb. 18, bought $1.2212 at 1 p.m. in Frankfurt. ``The ECB will keep its powder dry'' after the euro's decline, the head of the DIW German Institute of Economic Research, Klaus Zimmermann, said in an interview yesterday. Investors are also reining in expectations for a rate cut in the first half of the year, futures trading suggests. The rate on the three-month contract for June settlement has climbed five basis points since Friday to 2.02 percent at 1 p.m. The three- month lending rate was 2.06 percent.
Nordic Rate Cuts
A pick-up in economic growth hasn't prevented other European central banks from cutting interest rates. The central banks in Norway and Sweden both cut interest rates to the lowest in at least 59 years. The banks' moves came amid slowing inflation as their currencies strengthened and imports from Asia increased. The Bank of England kept its benchmark lending rate at 4 percent. The bank raised rates in two moves from 3.5 percent in November and February. Most economists expect policy makers to wait until May before raising again as they assess the impact of the two rate increases and the strengthening pound. A stabilization in the euro's exchange rate may make it easier for European companies to boost foreign sales in coming months. Bayerische Motoren Werke AG, the world's second-largest luxury carmaker, said Monday it expects record sales in 2004 and has increased its hedge against the dollar. Air Liquide SA, the world's largest industrial-gases maker, said last week it expects 2004 earnings to rise. //www.bloomberg.com