European Central Bank Holds Rates Steady

The decision may be further proof that the ECB is reluctant to take on an activist role in setting monetary policy for the 11 eurozone nations.
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European Central Bank

held its main refinancing rate at 3% as expected Thursday and also chose to keep its


money-supply reference value, one of the bank's main benchmarks for setting interest rates, steady at 4.5%.

Although the M3 figure is not supposed to be a specific target for money-supply growth in the eurozone, many central-bank watchers had speculated the ECB would raise the value because the region's money supply has grown consistently at over 6% for the past few months.

The decision is further evidence of the ECB's reticence to take on an activist role in setting monetary policy for the 11 nations in the euro area. When the ECB raised rates

last month, ECB President

Wim Duisenberg

said the central bankers opted for a larger 50-basis-point hike to eliminate the need for another increase in the near future. At a press conference Thursday to explain the ECB's decisions, Duisenberg said although the M3 reference value would only be reviewed on an annual basis, the bank would not be beholden to any specific number.

"The derivation of the reference value of 4.5% is an expression of a medium-term oriented approach," Duisenberg said. However, "the generous liquidity situation in 1999 will have to be borne in mind" when determining its appropriateness.

Although the euro has been hitting record lows against the U.S. dollar over the past couple of days, Duisenberg appeared sanguine over recent foreign-exchange developments, chalking up the near parity of the two currencies more to American economic strength than European weakness.

Indeed, he reiterated his familiar mantra that the euro should appreciate over the long term, especially in light of bettering prospects for European growth. Duisenberg said the eurozone could look forward to real

gross domestic product

growth, increasing to 3% next year from 2% in 1999. He did not, however, rule out that the ECB might intervene on behalf of a flagging euro if deemed necessary. The euro was recently worth $1.0049.

Whether currency traders will test the president on that or not remains to be seen, but "the ECB has been unable to shake off suspicion in the markets that its stance on the exchange rate is one of benign neglect," according to

Greenwich NatWest

economist Catherine Lee. In the meantime, the euroland economy should receive a boost as Europe's exports continue to remain cheap abroad.

The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria. M3 includes cash in circulation, short-term deposits, repo operations and money-market funds.