The European Central Bank will probably keep its benchmark lending rate at a six-decade low today to aid an economic recovery threatened by record oil prices and rising unemployment, a survey of economists showed. The ECB will leave the refinancing rate at 2 percent when its 18-member governing council meets in Brussels, said all 34 economists in a Bloomberg survey. The decision will be announced at 1:45 p.m. local time and ECB President Jean-Claude Trichet will hold a press conference 45 minutes later. Oil prices surged beyond $50 a barrel this week and unemployment held at a five-year high of 9 percent in August, tempering business and consumer demand. Trichet, who forecasts a ``gradual recovery'' in the euro region, said Oct. 1 he won't neglect the hazards to growth represented by higher energy costs.
The ECB ``will be sensitive to potential risks to growth and that may postpone the rate rise a little further on,'' said Ken Wattret, senior economist at BNP Paribas SA in London. The central bank, which meets outside its Frankfurt headquarters twice a year, hasn't touched borrowing costs since lowering rates in June 2003. With the ECB predicting slower inflation next year, Trichet may wait before following the U.S. Federal Reserve and the Bank of England in raising rates. The Bank of England will probably also keep borrowing costs unchanged today, leaving its benchmark rate at a three-year high of 4.75 percent. The Bank of England's decision will be announced at noon in London.
Fed vs ECB
The Fed's policy-making Open Market Committee next meets on Nov. 10. Futures contracts on the overnight lending rate show an 86 percent probability that the bank will raise rates another quarter point for the fourth time this year to 2 percent. Investors are starting to rein in their expectations for higher rates in Europe amid signs of slowing growth, futures trading suggests. The yield on the three-month Euribor contract for March settlement has slipped about seven basis points in the past month to 2.39 percent at 8:47 a.m. in Frankfurt. The Euribor contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's start in 1999. The Euribor three-month money market rate was 2.15 percent. Growth is unlikely to accelerate in coming months as exports lose steam and businesses and consumers fail to compensate, the Brussels-based European Commission said in its quarterly economic report on Oct. 5. German factory orders dropped more than economists expected in August and a Bloomberg gauge of European retail sales fell for a second month in September.
Energy Effect
ECB policy makers are signaling increased concern about the effect of energy costs on the economy. Spanish central bank chief Jaime Caruana said in an interview on Oct. 2 that oil costs are a ``significant risk'' to growth. Crude oil futures rose to a record $52.24 a barrel in after- hours electronic trading on the New York Mercantile Exchange after a U.S. government report yesterday showed the country's oil inventories increased less than expected. Oil prices soared 60 percent this year amid concern about supply disruptions and increased global demand. The increase in oil costs won't have a lasting impact on inflation in the euro region, with wage increases restrained by rising unemployment, ECB Chief Economist Otmar Issing said in Washington on Oct. 3. There are no signs of ``stronger underlying inflationary pressures,'' Issing said.
Job, Price Cuts
Inflation slowed to a five-month low in September as stagnant consumer spending made it harder for companies to pass higher fuel costs onto consumers. The annual pace of consumer price increases declined to 2.2 percent from 2.3 percent. Companies including Volkswagen AG, Europe's largest carmaker, and Hennes & Mauritz AB, Europe's largest clothing retailer, are cutting prices on some products to spur demand. The export-led recovery of the euro region's $8.7 trillion economy cooled in the second quarter as the pace of growth in consumer spending halved. KarstadtQuelle AG's plan to shut stores may affect as many as 22,000 jobs at Germany's largest department store, the Ver.di union said last week. Volkswagen AG, Europe's largest carmaker, is threatening to cut 30,000 jobs unless workers accept a pay freeze. The ECB forecasts that inflation will slow to about 1.8 percent next year from 2.2 percent in 2004. Irish central bank chief John Hurley said on Sept. 17 that inflation is ``not a great concern'' and Austrian counterpart Klaus Liebscher said five days later he favors a ``steady hand'' policy on rates. Clouding the ECB's outlook, money supply has remained above the level the bank says is compatible with price stability since June 2001 and accelerated for a second month in August. Trichet said at last month's press conference that excess money supply risks fueling ``strong asset price increases.''
For now, the ECB is still forecasting a ``gradual recovery.'' European consumers and business confidence improved in September, a survey released by the European Commission on Sept. 30 showed. French household spending rose in August. ``The central scenario remains one of a gradual recovery,'' the ECB's Caruana said. ``It is too early to change that.'' ///www.bloomberg.com