The European Central Bank held its main refinancing rate at 2 per cent for the 22nd straight month on Thursday.

The move was widely expected given the deterioration in eurozone economic data since the March meeting. All 30 economists polled by AFX News and Agence France-Presse had forecast the ECB would remain on hold, with only one predicting a hike before the second half of 2005.

The futures market has moved to pricing in an initial hike in October, rather than the September move it saw a month ago.

A number of members of the ECB’s governing council are believed to be keen to raise rates as soon as possible, particularly in the wake of the decision by European Union finance ministers on March 20 to loosen the EU’s stability and growth pact.

The move, which gave member countries greater leeway to run fiscal deficits greater than 3 per cent of GDP, is potentially inflationary, provoking the ECB to say it was “seriously concerned about the changes”.

Yves Mersch, a member of the ECB’s governing council, said: “If there is relaxation on the fiscal side, it will not remain without consequence on the monetary side.”

Buoyant money supply growth has also prompted some concern from hawks on the ECB. M3, a broad money supply measure watched closely by the bank, grew at an annual rate of 6.4 per cent in February, potentially hinting at greater inflationary pressures in the pipeline.

“Several ECB members continue to fret over the high levels of monetary growth across the currency area, which is blamed for the fast pace of house price appreciation seen in certain areas of the eurozone, notably Spain and Ireland,” said Investec Securities.

However the continuing poor economic health of the eurozone has so far not given the ECB the opportunity to raise rates.

Earlier this week the European Commission downgraded its forecast for economic growth in the eurozone to 1.6 per cent in 2005, from 2 per cent, pinning the blame on high oil prices and a strong euro.

The Commission also saw eurozone inflation tumbling from 2.1 per cent in 2004 to 1.9 per cent this year and 1.5 per cent in 2006, well below the ECB’s target rate of “close to, but below” 2 per cent.

Core inflation in the eurozone fell to 1.6 per cent in the year to March, from 1.8 per cent in February, even as higher energy prices caused the headline inflation reading to edge up to 2.1 per cent.

Rising unemployment will have heaped further political pressure on the ECB not to hike rates. France has seen its unemployment rate rise above 10 per cent, joining that of Belgium (12.8 per cent), Germany (12 per cent), Spain (10.5 per cent) and Greece (10.1 per cent).

Sentiment also remains weak. French business confidence has fallen to a 15-month low and that of Germany to an 18-month low, while Italian business confidence is at its weakest level for 20 months.

Sentiment has been damaged by rising oil prices, which are likely to act as a further drag on economic growth.

Admittedly the euro has fallen against the dollar from $1.314 at the time of the March meeting to $1.289 today, but any eurozone rate hike risks sending the euro back up towards the highs of $1.365 seen in December 2004, further damaging the zone’s fragile export-led recovery.

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