The European Central Bank held its key interest rate steady at 2% at its regular monthly policy-setting meeting in Frankfurt today, refusing to bow to pressure to cut rates to inject life into the euro zone's stagnating economy.
In a widely expected move, the bank maintained the minimum bid rate for its regular refinancing operations at 2%, its same level for exactly two years. It also held its other two key rates - the deposit rate and the marginal lending rate - unchanged at 1% and 3%, respectively.
The status quo won the day after a series of disappointing economic indicators caused the ECB to bide its time. The bank also resisted calls from the governments of Germany and Italy and the Paris-based Organisation for Economic Cooperation and Development to cut rates.
The OECD had suggested a half-point reduction, but the ECB fears such a move would cause inflation.
ECB President Jean-Claude Trichet insisted this afternoon that the low rates were 'supporting growth'. He said the bank's governing council was of the unanimous opinion that the rates remained 'appropriate'.
The rejection by voters in France and the Netherlands of the European Union constitutional treaty appeared to have little effect on the ECB's decision.
After economic growth of 0.5% in the first quarter of 2005, the euro zone has slowed in the second quarter with the industrial and consumer sectors showing signs of weakness, especially in France and Germany, where unemployment rates stand at 10.2% and 11.6%.
The European Commission, the EU executive body, yesterday cut its forecast for euro zone economic growth in the second quarter. The commission said it now expected the 12-nation single currency area would grow between 0.1 and 0.5% in the second quarter on a quarterly basis, trimming back its forecast by 0.1 percentage point.
The ECB followed suit today, cutting its growth forecasts for the euro zone in 2005 to 1.4% from 1.6%. Next year's economic growth forecast was also revised lower, from 2.1% to 2%.
The ECB also raised its inflation forecast for 2005 to 2% from 1.9%, but lowered it for 2006 to 1.5% from 1.6%.
