The European Central Bank is expected to keep interest rates for countries using the euro on hold when its board gathers for its regular meeting tomorrow.
Analysts said concerns about the euro’s slide against the dollar swung arguments against the Frankfurt-based bank cutting rates from their current level of 3%.
Peter Dixon, senior economist at Commerzbank in Frankfurt, said a rate cut could be prompted by the lack of an inflation threat and economic weakness in Europe, especially Germany.
But he added: “If the European economy really is as sick as it appears, a quarter point drop in interest rates isn’t going to help anyway.”
Predictions of a rate hold in Europe came as the Bank of England announced that it was keeping UK rates on hold at 5.5%.
A cut in European interest rates now would be likely to further reduce the value of the euro against the dollar and the pound, something the central bank does not necessarily want to encourage, analysts said.
The euro has declined steadily in value since its launch, due to the continued strength of the US economy in comparison with Europe.
German Finance Minister Oskar Lafontaine has welcomed the drop, which makes goods made in Germany or other euro countries more competitive on the world market.
He has also been the most vocal in campaigning for a further drop in interest rates, which he argues would stimulate growth and create jobs.
But Bank president Wim Duisenberg has steadfastly resisted the pressure from Lafontaine and others, arguing that Europe’s problems have more to do with rigid labour markets and government policies than with interest rates.
EGi News 03/03/99
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