ECB leaves interest rates unchanged

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Posted 10:04AM on Thursday, January 3, 2002

FRANKFURT, GERMANY - With attention focused on the launch of euro cash, the European Central Bank left its key interest rate unchanged Thursday for the dozen countries using the new currency. The decision by the bank's 18-member policy council was widely expected. The Frankfurt-based bank last cut its main refinancing rate Nov. 8, lowering it by a half percentage point to 3.25 percent. Many expect it to reduce the cost of borrowing further in the coming months, but recent comments from ECB President Wim Duisenberg suggest it will wait for more data on Europe's sluggish economy before moving again. Moreover, the debate about interest rates has been overshadowed by the introduction of euro notes and coins that started Tuesday. Duisenberg planned a special news conference on the progress of the massive logistical task ahead of his monthly briefing on monetary policy. ``I think perhaps people were hoping they would cut rates and help the economy out a bit, but nobody really expected them to,'' said Nigel Anderson, an economist at RBS Financial Markets in London. The decision ``is fully consistent with the signals they've been giving for the past several weeks since the last meeting,'' he said. ``They don't want to surprise markets in a situation where they want to create a calm environment for the introduction of euro notes and coins,'' said Michael Schubert, an economist at Commerzbank in Frankfurt. Central bank governors arriving for Thursday's meeting all pronounced themselves satisfied with the changeover, reporting no major problems. ``This success proves the euro is really going to change Europe,'' said Portugal's Vitor Constancio. After two days in circulation, 200 million people - two thirds of the euro zone population - had euro coins in their pockets, and 60 million people had euro notes, obtained either from cash machines, bank withdrawals or as change from cash transactions, the European Commission in Brussels said Thursday. A full 20 percent of all cash transactions were carried out in euros - ranging from 3 percent in Italy to 50 percent in France and the Netherlands, the commission said. More than 90 percent of cash machines in the 12 euro zone countries were dispensing euros by Wednesday. The machines are the primary source of the new bills. There were no reports of major logistical problems, the commission said, noting longer lines in commercial banks and highway toll booths; longer queues for social security benefits in Ireland and Italy, as well as a brief technical breakdown of electronic payments in Austria. Still, with old currencies good for up to two months, depending on the country, ``there is some way to go before the changeover is completed,'' the commission said. ``Many people in small towns and villages have still not replaced their national currency with euros and the practical arrangements for withdrawing national currencies are only just starting.'' Pedro Solbes, the European Union's economic and monetary affairs commissioner, said in Frankfurt he expects the transition to the euro to be complete by the end of the second week, the target set by the ECB. Amid reports that the changeover in banks, stores and businesses was going without major hitches, the euro traded at around 90 U.S. cents Thursday, after a sharp rise of 1.6 percent Wednesday. Schubert said it had recovered ground lost due to uncertainty over the transition. ``Now we see that nothing has happened, everything has gone well, and the euro has gone back up to where it was in the middle of December,'' Schubert said. ECB officials and some economists say currency markets are still pricing the euro too low against the dollar, arguing that trade performance, interest rates and growth prospects speak in the currency's favor. Some economists argue that another interest rate cut would bolster the euro, which is still down by about 25 percent from its peak. Lower rates could stimulate economic growth eroded by last year's global slowdown and the wave of layoffs that followed the Sept. 11 attacks. The ECB cut rates only four times last year, compared to the 11 reductions by the U.S. Federal Reserve. But Duisenberg had damped expectations for imminent further reduction, saying in an interview with Germany's Handelsblatt newspaper before Christmas that another cut could follow a more optimistic inflation forecast - but no such forecast has been issued so far. Lower oil prices have helped inflation in the countries using the euro sink to 2.1 percent in November, down from an eight-year high of 3.4 percent in May. Duisenberg has said he expects it to fall below the bank's target of 2 percent this year - which could clear the way for lower rates down the road. Economist Anderson forecast the bank would cut by a half percentage point sometime during the first quarter.