Sat, 05 Mar 2005

From: AFP

ECB holds rates steady as economy falters

Agence France-Presse Frankfurt

The European Central Bank held key rates steady on Thursday and downgraded its 2005-2006 growth forecasts for the 12-country eurozone amid signs its economic recovery lost some momentum late last year.

The ECB held the minimum bid rate for its regular refinancing operations steady at 2.0 percent, where it has been since June 2003.

And the guardian of the euro also held its other two key rates -- the deposit rate and the marginal lending rate -- unchanged at 1.0 percent and 3.0 percent respectively.

At the same time, the ECB cut its forecasts for growth for both this year and next.

According to the bank's own staff projections, the eurozone economy would grow by 1.6 percent in 2005, slower than the previous forecast of 1.9 percent published in December.

And growth would pick up only modestly to 2.1 percent in 2006, fractionally short of the 2.2 percent forecast previously.

The reason for the downgrade was "disappointing" economic data for the latter part of 2004, Trichet explained.

The euro area economy grew by a meager 0.2 percent in the last three months of last year.

However, there was reason to assume that the slowdown would prove only "a transitory phenomenon," the Frenchman said.

Global economic growth would remain strong, boosting eurozone exports.

And on the domestic side, investment would continue to benefit from "very favorable" financing conditions, robust earnings and greater business efficiency.

"Accordingly, we expect continued economic growth in 2005 and 2006," he said.

There were some downside risks to such projections, such as "high and volatile oil prices and persistent global imbalances," the ECB chief cautioned.

Exchange rates were another factor of uncertainty.

"We confirm our position -- expressed when the euro rose sharply -- that such moves are unwelcome and undesirable for economic growth," Trichet said.

The ECB was working on the assumption that the euro-dollar exchange rate would average 1.30 dollars this year.

Turning to the outlook for price stability, the ECB expected area-wide inflation to average 1.9 percent in 2005, down from the previous forecast of 2.0 percent. Inflation would then to slow to 1.6 percent in 2006.

That would put area-wide inflation comfortably below the ECB's ceiling of 2.0 percent.

But here, too, there were "several upside risks to these projections," notably oil price developments, Trichet warned.

For the time being, the guardian of the euro expected oil prices to average 44.7 dollars a barrel this year, fractionally higher than the previous forecast of 44.4 dollars in December.

Oil prices would then come down to an average 42.2 dollars a barrel in 2006. The bank would remain on its guard regarding potential second-round effects of past oil price increases. Trichet said.

With regard to money supply growth, which the ECB views as a yardstick for medium-term inflation, Trichet said there was "substantially more liquidity in the euro area than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term and warrants vigilance."

The ECB chief left no doubt that the bank would be compelled to tighten monetary conditions once the economic recovery gained momentum.

"It is clear for all observers on the market... everybody knows that at (some) time we will have to increase rates," Trichet said.