Europe leaves interest rates unchanged

/ Source: The Associated Press

The European Central Bank left interest rates unchanged Thursday, with poor fourth-quarter growth data and declining business confidence heightening worries about the strength of the economy.

The bank's 18-member governing council left the key refinancing rate at 2 percent, where it's been since June 2003.

All 45 economists polled by Dow Jones Newswires predicted that is what the board would do.

Most think the bank's next move will be a rate 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.

Many economists now expect the ECB to wait until the third quarter of this year.

European Union data last month showed that the economy in the 12 countries that use the euro grew by only 0.2 percent in the fourth quarter, slowing from 0.3 percent growth in the previous three months and undercutting many economists' expectations. Germany, the Netherlands, Italy and Greece all saw output shrink.

Germany's Ifo index of business sentiment, a leading indicator in Europe's biggest economy, dropped unexpectedly in February, while the European Union's executive Commission said consumer confidence across the euro zone was flat for the sixth consecutive month.

In Germany, unemployment rose to a new post-World War II record in February, with more than 5.2 million people out of work — although the increase was due largely to a new benefit system that resulted in more people registering as unemployed.

The changes are intended to cut the jobless numbers eventually by pushing unemployed to find work and get off benefits. But in the meantime, the higher unemployment rate intimidates consumers who worry about their own security and how much money they'll have to spend, dampening growth.

Inflation gives the bank little reason to act now. Euro-zone inflation dropped to 1.9 percent in January from 2.4 percent in December, falling below the bank's 2 percent target for the first time in 10 months.