ECB keeps rates on hold as German orders rise

4th August 2005, Comments 0 comments

4 August 2005, FRANKFURT - Signs of a pickup in the 12-member eurozone helped the European Central Bank to stick to the status quo and keep rates on hold Thursday, as official data showed key German factory orders jumping by a bigger-than-forecast 2.4 per cent in June.

4 August 2005

FRANKFURT - Signs of a pickup in the 12-member eurozone helped the European Central Bank to stick to the status quo and keep rates on hold Thursday, as official data showed key German factory orders jumping by a bigger-than-forecast 2.4 per cent in June.

A renewed sense of optimism about the outlook for the 12-member eurozone allowed the ECB to wave off calls for a rate cut and leave rates unchanged at a historic low of 2 per cent.

As is often the practice during the summer holiday period, the 18 members of the ECB's rate-setting council met via a teleconference Thursday to deliberate on the eurozone's rate and economic outlook.

ECB chief Jean-Claude Trichet is also not due to hold a press conference after the governing council meeting, which means that analysts will have to wait for the release of the bank's next monthly bulletin for hints as to how the bank is sizing up current economic developments.

As things stand at the moment, analysts expect the notoriously cautious ECB to keep rates on hold for the foreseeable future as it waits for further concrete signs about the impact of high oil prices on inflation and economic growth in the currency bloc.

Speaking at his press conference four weeks ago, Trichet said the ECB was in "wait-and-see" mode.

In particular, the ECB has been attempting to balance up the inflation risks caused by the recent surge in oil prices to over 60 dollars a barrel and a recent weak economic performance by the eurozone's leading economies - Germany, France and Italy.

Of concern to the ECB, however, official data shows inflation edging up and further out of reach of the bank's 2 percent target ceiling. Europe's statistics office projects a 2.2 percent inflation rate in July.

But coming in the wake of a series of better-than-expected economic data and key indicators in recent weeks, a growing number of analysts now believe that the bank's next move is likely to be an increase in rates.

Even then, analysts expect the ECB to deliver only a very modest 25-basis-point increase possibly by the middle of next year with many economists believing that a rate cut now would have virtually no impact on economic activity in the eurozone.

In recent months, several leading European political leaders have joined key international institutions such as the Paris-based Organization for Economic Co-operation and Development in calling on the ECB to trim rates so as to underpin growth.

After what is thought to have been a weak second quarter, eurozone growth is expected to come in this year at a less-than-thrilling 1.3 per cent.

Up until now the 10 percent slide in the euro since it hit a record 1.36 dollars at the end of 2004 has helped the ECB to wave off the pressure for a rate cut and at the same time underpin the currency bloc's export machine.

But while they were deliberating Thursday, ECB's governing council members received fresh evidence on the state of the eurozone economy with official data showing key German factory orders.

After bounding ahead in May by 2.3 per cent, German order books jumped by a bigger-than-forecast 2.4 per cent in June, which represents a rise of 6.1 per cent on the year.

That said, however, economists remain cautious about the eurozone's growth outlook and insist that any upswing in the currency bloc's economy will be gradual and modest with unemployment lagging behind the recovery as governments battle on to try to reform their fragile labour markets.

More to the point, the job fears generated by what is likely to be an agonisingly slow improvement in the labour market mean that private consumption is expected to remain a drag on growth in the eurozone.

DPA

Subject: German news

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