No rate increases expected as ECB meets

Published November 30th, 2000 - 02:00 GMT

The European Central Bank was not expected to announce any changes in euro-zone interest rates after its regular fortnightly meeting on Thursday, November 30. 

 

And many economists said that they were not expecting a further rate rise until mid-2001 at the earliest. 

 

The ECB's governing council, the body responsible for setting interest rates in the 11-nation euro zone, was scheduled to meet Thursday for its penultimate meeting this year. 

 

In a poll of 33 economists carried out by AFP and its financial news subsidiary AFX News, none predicted any change in rates this week. 

 

And 27 said that they were no longer expecting further rate changes before next year. 

 

The ECB has already raised rates by 2.25 percentage points in the past year, last increasing its key refinancing or "refi" rate by a quarter of a percentage point to 4.75 percent at the beginning of October.  

 

But with increasing signs of a noticeable downturn in the euro, and inflation set to peak, the bank looked unlikely to raise rates again for the time being, for fear of choking off growth altogether, economists said. 

 

On Wednesday, Ifo, one of the leading economic research institutes in Germany, warned that any further monetary tightening by the ECB would "constitute a danger for the economy." 

 

The latest gross domestic product (GDP) data for Germany, the biggest economy in the region, provided clear evidence of a slowdown, with GDP growing by just 0.6 percent in the third quarter from the figure for the second quarter, compared with growth of 1.1 percent in the preceding three months. 

 

On the inflation front, the ECB appears to believe that everything is under control, despite persistently high oil and fuel prices. 

 

Bundesbank chief and ECB council member Ernst Welteke said on Wednesday that core inflation in the euro zone was still within the ECB's definition of price stability, even if the headline figure looked much higher.  

 

The ECB defines price stability as price increases of no more than 2.0 percent on an annual basis.  

 

The latest cost of living data showed that inflation in the 11-country euro zone, as measured by the harmonized index of consumer prices (HICP), was well above that, standing at 2.7 percent in October. 

 

But that was because of the drastic rise in oil prices and the decline in the value of the euro, Welteke argued.  

 

"Monetary policy makers cannot prevent such short-term external factors," Welteke said.  

 

"Core inflation remains unchanged at the level of price stability," he insisted. 

The latest M3 money supply growth data, published earlier this week, also pointed to an easing of inflationary pressures in the medium term.  

 

A further signal that no further rate rise was on the cards just yet came on Tuesday under the variable-rate auction of funds in the ECB's regular "refi" operations when the cost of borrowing in the euro-zone edged only marginally higher.  

 

The lowest rate at which the ECB allocated funds was 4.82 percent, above the 4.80 percent set at last week's funds auction, bringing the effective interest rate for the single currency area to 0.07 percentage points above the ECB's minimum bid rate of 4.75 percent.  

 

While it is the gap between the minimum bid rate and the rate at which commercial banks bid that ECB watchers watch for signals on future movements in interest rates, economists said that the gap was still too small to provide any clues about possible future rate increases.— (AFP)  

 

© Agence France Presse 2000  

© 2000 Mena Report (www.menareport.com)

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