FRANKFURT, 5 September 2003 — The European Central Bank held its key interest rates steady as expected yesterday and offered no sign it might be willing to cut them again in the near future while euro-zone governments failed to get their finances in order.
Indeed, with the euro off its recent highs against the dollar and the first tentative signs emerging of an economic recovery in the euro area later this year, some observers are beginning to believe the current cycle of monetary easing might actually be over.
Meeting for the first time after a monthlong summer break, the ECB decided to hold its central “refi” refinancing rate steady at 2.00 percent, where it has been since June 5. And it also left its other two key rates - the deposit and marginal lending rates - unchanged at 1.00 percent and 3.00 percent, respectively. The decision to maintain the status quo on rates had been widely expected.
Earlier yesterday, the Bank of England also held its key rates unchanged following recent signs of a recovery in the British and global economies. And top ECB officials have also recently taken a cautiously more optimistic tack on the outlook for growth in the 12 countries that share the euro in the coming months.
Explaining the reasoning behind the decision at a news conference after the meeting, ECB Vice President Lucas Papademos said the ECB continued to expect a pickup in economic activity in the single currency area later this year. While areawide GDP showed zero growth in the second quarter of 2003, “survey data indicate that confidence is growing and recent financial market developments are also in line with our main scenario of a gradual upturn in economic activity,” Papademos said.
“In line with available forecasts and projections, we continue to expect this upturn to start in the second half of the year and then to strengthen further in the course of 2004,” the ECB’s No. 2 said. There were still downside risks to the growth scenario, but those risks had declined over the past couple of months, Papademos said.
And with euro-zone inflation also set to remain firmly under control, the ECB deemed the current cost of borrowing in the euro area to be “appropriate”, he added. The term “appropriate” is seen by the financial markets as the ECB’s code word for signaling no imminent change in rates.
However, the ECB might be unwilling to help kick-start the economy by cutting interest rates further while governments were failing to pull their weight and get their finances in order. Papademos expressed “great concern” at recent developments in the public finances of some euro-zone governments, in a pointed reference to the ballooning shortfalls in economic heavyweights France and Germany.
Under terms of euro membership, enshrined in the European Stability and Growth Pact, governments are not allowed to run-up public deficits in excess of 3.0 percent of gross domestic product (GDP). But both Germany and France were in breach of that ceiling last year and look set to remain so this year, as well.
And German Finance Minister Hans Eichel said in a television interview that it was “difficult” to bring the German deficit ratio back within EU limits in 2004. Furthermore, at an informal meeting in Dresden, eastern Germany, Chancellor Gerhard Schroeder and French President Jacques Chirac called for a greater emphasis on growth in the interpretation of the stability pact.
Such noises are likely to raise hackles in the Eurotower in Frankfurt, which argues that sound fiscal policies are essential to boosting investor and consumer confidence and enhancing the prospects for stronger economic growth.