ECB unlikely to raise interest rates as euro zone slowdown looms

The European Central Bank looks likely to exercise caution by keeping interest rates unchanged at its council meeting today, as fresh evidence pointed to a slowdown in the euro zone, even as inflation simmers.

Meanwhile, it emerged yesterday that the Eurosystem spent around €2.4 billion (£1.89 billion) in the September 22nd intervention by Group of Seven central banks to support the euro, according to figures released by the ECB.

The euro closed at 0.8724 to the dollar, in European trading, down slightly from 0.8755 at Tuesday's close.

A fall in French consumer confidence last month heightened fears that the euro zone economy was past its peak, fuelling speculation that the ECB will hold off increasing rates.

But analysts acknowledged that the ECB might decide to spring a surprise on markets by moving as soon as this week.

The ECB meets again in two weeks, so could keep its options open.

A survey of economists gave a 68 per cent chance that the ECB would keep its benchmark minimum bid rate unchanged at 4.5 per cent.

Economists said the ECB would pause to consider the latest data, pointing to a possible pick up in inflation and a possible slowdown in growth, in euro zone countries. The euro zone's producer price index - a key indicator of pipeline inflation - posted a 5.6 per cent annual rate in August, with July revised up to the same rate, the EU statistics office Eurostat said.

The ECB also faces growing evidence that high oil prices are putting a damper on consumer and business sentiment.

French consumer confidence data released yesterday shocked analysts by posting their biggest slump in five years, diving to -8 in September from +2 in July.

Earlier yesterday the British government said the Bank of England had bought £85 million in the concerted intervention with the ECB, the US Federal Reserve, the Bank of Japan and the Bank of Canada to help rescue the sagging currency.

"This action was taken as part of a concerted intervention by the G7 monetary authorities because of the shared concern about the potential implications of recent movements in the euro for the world economy," Britain's Treasury said,

The amount spent by the Eurosystem, currently worth $2.1 billion (€2.4 billion), was the bulk of a total intervention worth €3.5-€5.5 billion euros, according to market estimates.

The euro benefited briefly from the intervention, but has since shown renewed signs of weakness. Last night European Commission President, Mr Romano Prodi, said economic growth in the euro zone would overtake US growth in 2001.

"Since we created the euro, [growth] has gone better and better. We increased our growth by two percentage points and in one year we will overtake them [the United States]," Mr Prodi said.

Answering a question on the euro's fall against the dollar, Mr Prodi said central banks intervened to support the European currency not only to bolster the euro but also because a weak euro was damaging the US.

"We have lost value to the dollar but, one must remember, this was not good for the dollar because if the Federal Reserve and our banks intervened together to support the euro it was because such a weak euro was also hurting the US," Mr Prodi said.

Last month the International Monetary Fund estimated US economic growth would slow to 3.2 per cent in 2001 from 5.2 per cent this year. The euro zone was in for a better time, forecast to grow 3.4 per cent.