The European Central Bank left interest rates unchanged Thursday, with Bank President Jean-Claude Trichet saying recent economic indicators suggest a moderate recovery remains on track.
The widely expected decision by the bank’s 18-member governing council left the bank’s key refinancing rate at 2 percent. The rate has been unchanged for 20 straight months since a half-point cut in June 2003.
“Recent data on economic activity, as well as survey information, suggest ongoing moderate growth in the fourth quarter of 2004, and a broadly unchanged situation around the New Year,” Trichet said in his monthly post-decision statement.
“Looking ahead, the conditions remain in place for economic growth to pick up and become more self-sustained in the course of the year.”
Most observers think the central bank’s next move will be an increase to ward off inflation as the economy grows. But an uncertain start to the upswing has led the bank to hold off, since an increase at the wrong time could snuff out the recovery by increasing the cost of credit for businesses.
Some economic indicators have strengthened in recent days, including an upturn in the German Ifo Institute survey of business sentiment and a rise in the euro-zone purchasing managers index.
The stronger the expectations of growth are, the closer a rate increase could be.
A euro that has risen sharply against the U.S. dollar has given the bank more time to wait by easing pressure on inflation. A stronger currency makes imports cheaper — particularly oil, which is priced in dollars. Inflation ran at an annual 2.4 percent in December, above the bank’s guideline of 2 percent — but the bank predicts the rate will fall to below 2 percent during the year, barring adverse shocks to the economy.
Economists say growth is likely to continue despite a slowdown in the third quarter of last year. Doubts remain among some economists; while five of 45 economists in a Dow Jones Newswires survey predicted a rate increase in the second quarter, and three thought growth will be so shaky that the bank will have to cut rates to stimulate the economy.
The bank controls monetary policy for the 12 countries using the euro currency.