ECB Leaves Interest Rate Unchanged (Bloomberg) (07-02-2008)

Feb. 7 (Bloomberg) -- The European Central Bank has kept borrowing costs at a six-year high, while its President signaled that risks to euro-region economic growth are increasing. Investors predict that the slowing economy will prompt the ECB to reduce its key interest rate.

The euro weakened 0.8 percent to $1.4521 at 3:21 p.m. in Frankfurt and the yield on 10-year German bunds fell 5 basis points to 3.85 percent.

The ECB on Dec. 6 projected the euro-region economy to expand about 2 percent this year after 2.6 percent in 2007. Trichet said today that latest data confirmed the bank's assessment that "risks surrounding the economic outlook lie on the downside".

The International Monetary Fund on Jan. 29 cut its 2008 euro-region growth estimate by half a point to 1.6 percent, saying that "no one is going to be exempt from some slowdown". The Washington-based fund also trimmed its growth estimates for the U.S. and Japan, the world's two largest economies.

Stock markets have dropped this year on concern the U.S. economy is sliding into a recession, curbing earnings growth. Germany's benchmark DAX Index has lost 16 percent this year and the Dow Jones Stoxx 600 Index 12 percent.

The ECB's 21 rate-setting governing council was "unanimous to decide on maintaining rates at 4 percent", which and "there was no call for an increase in rates of a decrease in rates", Trichet said today. The current level is "permitting" the ECB to deliver price stability in the medium term.

Inflation in the 15 countries sharing the euro accelerated to 3.2 percent in January. The ECB predicted in December that price gains will average about 2.5 percent this year after 2.1 percent in 2007. That would make 2008 the ninth year the bank failed to achieve its goal of keeping inflation just below 2 percent.

"The ECB sounds more worried by downside risks to growth than in previous months", said Dario Perkins, an economist at ABN Amro in London. "This suggests the tightening bias has gone. But don't assume this means interest-rate cuts are coming soon. The ECB is still constrained by inflation".

Source: Bloomberg