Despite financial crisis, ECB should hold steady

[October 02, 2008]  FRANKFURT, Germany (AP) -- The European Central Bank is expected to hold its benchmark interest rate steady later Thursday as inflation fears outweigh the growing financial crisis.

The 15-nation euro zone is fighting high inflation, low growth and dim short-term prospects for more consumer and industrial demand as the global financial crisis unfolds.

But the bank could be prompted to cut its key rate from 4.25 percent -- where it has stood since July -- if the real threat of a recession raises its head in coming months, analysts said.

Howard Archer, the chief U.K. and European economist at Global Insight, noted "further deterioration" in euro-zone manufacturing coupled with preliminary figures showing inflation easing from 4.1 percent in August to 3.6 percent last month.

The economic picture "reinforces our growing belief that the ECB could cut interest rates from 4.25 percent to 4 percent before the end of 2008 as the heightened financial sector turmoil and very tight credit conditions heighten the danger of euro-zone recession," he said.

While a cut would bring the bank in line with its major peers, including the U.S. Federal Reserve, so far ECB president Jean-Claude Trichet has preferred to remain stalwart against inflation despite the uncertainty that has exploded in markets in the past three weeks.

On Tuesday night, he offered no hints about what sort of decision could be taken by the Governing Council when it concludes its meeting Thursday.

"What I can say is ... we will ensure the stability of prices," he said, adding that Europeans "are very chagrined to see the rise in the level of inflation."

Trichet has consistently hammered at the effects of inflation on the euro zone, the 15-nation bloc make up of 320 million people that accounts for more than 15 percent of the world's gross domestic product. In previous meetings of the ECB, he has gone out of his way to warn about its effects and the bank has kept the interest rate up to combat it.

Higher interest rates can reduce inflation because demand for goods and services can fall as a result of money becoming more expensive. At the same time, higher rates can make it harder for businesses to borrow and expand, with growth slowing as a result.

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On the Net:

http://www.ecb.int/

[Associated Press; By GEORGE FREY]

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