Published January 13, 2015
The European Central Bank left its key interest rate unchanged Thursday, continuing its vigil against inflation despite pressure to shelter the region's sagging economy from an unraveling global economy.
Most economists had expected the Frankfurt-based bank to leave its main interest rate unchanged — at 4.5 percent — when its top officials met to assess economic developments in the 12 nations that share the euro common currency.
Inflation — the ECB's top concern — stood at 2.9 percent in April, far above the bank's 2 percent target. That leaves the ECB little room to slash interest rates, because doing so tends to make inflation only worse.
But many economists say the ECB, under pressure to boost the economy with a rate cut, will take advantage of forecasts of cooling inflation to cut rates as early as July.
By then, oil prices are expected to be on the decline and high food prices should begin tailing off after Europe's foot-and-mouth disease crisis.
"The unspoken reason they will be cutting rates is that they are worried about the economy. But they will justify it on the medium-term outlook of falling inflation," said Nigel Anderson, an economist the Royal Bank of Scotland in London.
European finance ministers have conceded that the European economy is starting to feel the strain of the U.S. economic slump, and pressure is mounting for the ECB to ease the cost of borrowing for European businesses.
Belgian Finance Minister Didier Reynders admitted earlier this week that "growth is less robust that previously expected."
And EU Economics Commissioner Pedro Solbes warned that the end of the U.S. slowdown "has not yet been reached."
The ECB surprised markets by cutting interest rates by a quarter point May 10. At the time, the central bank said slower growth in the money supply was easing the threat of inflation. But economists speculated it also was reacting to mounting concern about the slowing economy.
"If there's leeway for a rate cut, the ECB might be well advised to use it to help the economy," said Jens Dallmeyer, an economist with Deutsche Bank in Frankfurt. "We can definitely see that there is a direct impact on the economy in slower export growth, a stagnating labor market and lower investment and consumption."
The European Commission forecast in April that euro-zone growth would slow to 2.8 percent this year from 3.4 percent in 2000. The independent ECB estimates potential growth at between 2 percent and 2.5 percent.
Meanwhile, the euro remains a wild card in the inflation outlook.
The single currency has hit six-month lows against the dollar in recent weeks, and has steadily fallen — by 10 percent since January — to dip below 85 cents Thursday. The euro remained mostly unchanged after Thursday's decision, as money traders mostly expected the ECB to stay its hand.
A weak euro can fan inflation by making it more expensive for Europeans to buy imports and raw materials such as oil.
Economists say the euro's value hasn't eroded enough yet to pose a serious threat, but they warn that a further slip could make it more difficult for the ECB to cut rates and still keep a cap on rising prices.