The European Central Bank (ECB) held interest rates steady today despite growing concerns about the growth prospects for the European economy and evidence of easing inflation.
Analysts will be disappointed but not surprised by the ECB's inactivity. ECB officials have argued for more time before they move, even though data point to anaemic growth and a surging euro is damping inflationary pressures.
"Interest rate levels are already incredibly low and [the ECB] has argued that they are low enough to stimulate economic recovery and . . . monetary growth tends to be very, very strong," said Mr Robert Prior-Wandesforde at HSBC in London.
But it seems only a matter of time before the next cut, as there is no evidence of a post-Iraq-war boom, and euro zone inflation has fallen to within a whisker of the bank's 2 per cent tolerance ceiling, analysts said.
The euro is up 14 per cent against the dollar in five months and has risen 8 per cent versus a weighted basket of currencies of major euro zone trading partners.
But the ECB has never reacted quickly to currency moves, arguing they may reverse quickly, and central bankers have signalled they would keep their hand steady.
The bank still foresees faster economic growth in the rest of 2003, but has scaled down its forecasts. ECB President Mr Wim Duisenberg said in April growth would not exceed 1 per cent this year.
That compared with a range forecast of 1.1 to 2.1 per cent growth in December. Still-high uncertainty has made the bank cautious in giving growth forecasts of late.
European economic sentiment is still very weak, despite the the relatively quick end to the war in Iraq. The services sector shrank again in April, though firms grew more optimistic, a Reuters survey showed this week.
Inflation is behaving accordingly, with a first estimate of the euro zone rate dropping to 2.1 per cent in April from 2.4 per cent in March, only just above the ECB's 2 per cent limit.
Additional reporting by