May 8, 2014 10:49 am

ECB likely to keep rates on hold at 0.25%

Headquarters of the European Central Bank in Frankfurt©Reuters

Increasing signs that the eurozone economic recovery is broadening have reduced the already slim chances of an interest-rate cut by the European Central Bank on Thursday.

Paris, however, will probably be frustrated by any ECB inaction. France stepped up its pressure on the ECB on the eve of its policy meeting to take action to lower the euro which Paris insists is harming recovery prospects by undermining exports.

Arnaud Montebourg, the economy and industry minister, said on Wednesday he believed the ECB had taken on board “a certain number of concerns that we have expressed recently”.

“Numerous governments have taken up this issue,” he claimed in parliament.

French ministers have repeatedly complained in recent weeks about the strength of the euro, with Manuel Valls, the prime minister, saying President François Hollande intends to take up the issue with his eurozone partners after this month’s European elections.

Paris is concerned that its efforts to cut labour costs for French industry to help restore its damaged competitiveness are being undermined by the relative strength of the euro, which hits major exporters such as the aerospace and pharmaceutical industries.

The currency is the second highest of Group of 10 countries against the dollar over the past two years, and continues to trade close to two-and-a-half-year highs against the greenback.

However, France’s rhetoric has met with German criticism. Bild, a German newspaper, this week quoted a senior Bundesbank official as saying there was concern French policy would “fall back into the 70s, a time long before the franc was a stable currency”.

The strength of the euro has played a significant role in the currency bloc’s inflation rate falling to less than half the ECB’s target of close to 2 per cent, as it makes imports less expensive.

And while Mario Draghi, ECB president, has said that the central bank was preparing to act with unconventional monetary policy to fight low inflation, recent economic data are pointing to a policy meeting that holds off from either cutting rates or embarking on any programme of bond buying, often referred to as quantitative easing. Benchmark interest rates are likely to remain at a record low of 0.25 per cent, a median estimate of economists show.

One measure that the ECB could announce on Thursday is to add liquidity to the eurozone’s financial system to counter a recent bout of volatility in money markets.

The most frequently mooted option is for the ECB to halt operations which mop up the liquidity added to the system by the central bank’s purchases of government debt through its Securities Markets Programme. At the moment, the central bank mops up around €165bn each week – a technique known in central bank parlance as sterilisation.

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