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ECB rebuffs pressure for a rate cut

4 March 2004

FRANKFURT – The European Central Bank waved off calls by political leaders for a cut in borrowing costs Thursday, leaving interest rates on hold and with bank chief Jean-Claude Trichet stressing the ECB’s independence and indicating that it was in no rush to ease monetary policy.

Despite political pressure spearheaded by German Chancellor Gerhard Schroeder and the French Prime Minister Jean-Pierre Raffarin for a monetary easing to help keep Europe on a growth path, Trichet told reporters following Thursday’s meeting of the bank’s 18-head rate-setting council: “I hear, I listen.”

But speaking at his regular monthly press conference, Trichet went on to say the bank made its decisions on a fully independent basis saying that it was the bank’s strong belief that it should not be influenced in anyway. In leaving the ECB’s benchmark refinancing rate at an historic low of two percent, Trichet insisted that the bank’s current monetary stance remained appropriate and that the 12-member eurozone was on course to a gradual recovery.

“Our main scenario of a continued gradual recovery in the course of 2004 and 2005 remains valid,” Trichet said. “This view is shared by available forecasts and projections, and is also broadly reflected in financial market developments.”

While conceding that the upswing had been relatively modest so far, Trichet also appeared to rebuff concerns the strong euro could hit Europe’s foreign orders by saying he expected a significant improvement in exports this year.

The Bank of England also announced Thursday that it was leaving rates on hold at four per cent after surprising markets with a 0.25 basis points rise last month.

In his comments to reporters, Trichet again underlined the bank’s concerns about the euro’s performance on the global forex market saying that the ECB was “totally sticking” to its previously statements expressing worries about “excessive volatility” in currency trading.

After slumping earlier in the week to a three-month low of around USD 1.21, the euro was again hovering at below USD 1.22 after the ECB’s decision to leave rates unchanged was announced.

Analysts, say, however, that the rebound in the dollar against the euro is helping to ease some of the pressure on the bank for a rate cut.

But the euro’s strong performance combined with uncertainty about the eurozone’s economic outlook and fresh data showing inflation below the bank’s two per cent target have fuelled market speculation that the ECB will ease monetary policy by the middle of the year.

The common currency has surged by about 50 percent since slumping to an all-time low of 82 US cents in October 2000.

But having charged to an all-time high of over USD 1.29 last month, many analysts believe that the common currency will again try to test the key USD 1.30 level in the coming weeks raising fresh concerns that a surge in the common currency could dampen exports and consequently derail the recovery.

Worries about Europe’s economic outlook lead to calls from both Schroeder and Raffarin for the ECB to trim rates as a way of checking the rise in the euro.

However, despite Trichet’s insistence that a pickup was taking hold in the eurozone, official data released Thursday underscored the fragile state of the currency bloc’s economic recovery.

Europe’s biggest economy, Germany, reported that seasonally adjusted unemployment jumped by 26,000 in February as employers held back from hiring, waiting for evidence that the upswing had taken hold.

At the same time, Germany released data showing key factory orders falling in January with foreign orders slumping by 2.8 percent as the strong euro hit export demand and domestic orders dropping by 1.2 percent.

Thursday’s ECB meeting was also held as a power struggle emerges between big and small European states over the future shape of the bank’s board with European finance and economic ministers due to decide on a new member of the bank’s six-member executive board next Monday.

The fight over who should replace Spain’s Eugenio Domingo Solans as a member of the ECB’s powerful management board is threatening to turn the bank into a new battleground in the struggle between big European states and their smaller counterparts for control of Europe’s key institutions in the enlarged European Union, which expands by 10 new members on 1 May.

But while Trichet said that ultimately the decision on Solans’ successor lay with other authorities he underlined the bank’s concern to ensure that the candidate for the executive board should be highly qualified. “Qualifications, qualifications,” he said was the bank’s message to those making the decision about Solans’ successor.

Subject: German news