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The Honolulu Advertiser

Posted on: Thursday, October 11, 2001

European Central Bank keeps rates steady

FRANKFURT, Germany — The European Central Bank kept its main interest rate steady today, awaiting more evidence on the economic fallout from this month's terrorist attacks in the U.S.

Economists had predicted the bank's 18-member policy council would not cut rates this soon after its dramatic half-point rate cut 10 days ago, and would choose to wait for hard economic data before moving again.

The bank cut its key interest rate Sept. 17 to 3.75 percent in a confidence-building move coordinated with the U.S. Federal Reserve.

The bank has said the U.S. economy is fundamentally strong and that it expects any slump to be short-lived. But it will take weeks or months before economic data comes in about the depth of any U.S. recession, which could slow Europe's economy by cutting its exports to the crucial American consumer market.

"I think it's too early for the ECB to make a judgment about the U.S. economy. They're as much in the dark as the rest of us," said Nigel Anderson, chief euro economist at RBS Financial Markets in London.

Anderson said he expected a rate cut in October, and another one by the end of the year. The half-percent cut 10 days ago — a strong statement by the ECB, which usually cuts by quarter points — was an exceptional move in an exceptional situation, he said.

The inflation outlook has improved recently with the fall in oil prices, giving the bank a freer hand with interest rates. In addition, the ECB has said that a growth slowdown would also put less upward pressure on prices, one of the reasons it gave in justifying that half-point cut.

Interest rates are the bank's chief tool to control inflation. Keeping them higher reduces the supply of money in the economy and limits inflation. Cutting them encourages growth by making it easier for business to borrow to build new facilities and expand.