ECB rejects rate cut despite German blues

The European Central Bank refused to cut interest rates yesterday despite data showing that Germany, the continent's largest economy, was suffering a sharp slowdown.

Wim Duisenberg, the president of the ECB, said: "The current level of interest rates remains appropriate to ensure the euro area economy will be able to maintain price stability in the medium term, and the ECB thus decided to keep interest rates unchanged."

The ECB's governing council agreed to keep its main refinancing rate unchanged at 4.5 per cent. The decision was issued just after figures showed that Germany had suffered an increase in unemployment and a fall in manufacturing orders in April. The jobless total rose by 18,000, the fifth monthly increase in a row. Orders for German industrial firms slumped by 1.1 per cent, from a decline of 3 per cent in March.

The gloomy data highlighted the dilemma the ECB faces in trying to push inflation back below its target without pushing the euro area's economies into recession. Mr Duisenberg said he was confident that inflation would fall back below 2 per cent, but he warned that there were inflationary pressures around the corner. "Inflation will start to fall in the course of this year and be below 2 per cent in 2002," he said in Frankfurt.

Analysts said Mr Duisenberg was trying to paint a balanced picture but might be confusing the market. David Brown, at Bear Stearns in London described Mr Duisenberg's remarks as "evasive and defensive".

"The ECB must be squirming in their seats at the moment in terms of how they resolve the policy bind," he said. "They are trapped between a rock and two hard places: the euro zone downturn, rising inflation and the euro, which is about to drop through the trapdoor."

On the currency markets the euro was hardly changed against the dollar at $0.8472. But the number of new applications for US jobless benefits rose last week to its highest level in almost nine years.