ECB rate decision seen as close call as markets stay jumpy

Financial market upheaval and fears of a credit crunch should stay the European Central Bank's hand when it mulls raising eurozone interest rates on Thursday, analysts here said.

But the bank kept observers guessing Wednesday by issuing a short statement which said that money market volatility had grown and that "the ECB is closely monitoring the situation." At Investec, analyst David Page said: "We do not think that the ECB will increase its refinancing rate while money markets continue to be dysfunctional."

Bank of America chief economist for Europe Holger Schmieding agreed, saying: "Persistent dislocations in the money market will likely force the ECB to stay on hold."

But Schmieding did not completely rule out a surprise hike by the guardian of the euro, and after the ECB statement was released he told AFP: "We're scratching our heads here.

"The ECB with its communications is not providing crystal clear guidance to the markets," Schmieding said. The ECB was initially set to raise its main lending rate for the 13-nation zone from the current level of 4.0 percent owing to strong economic growth and higher energy prices that threatened to ignite inflation.

The euro bank is scheduled to publish its latest growth and inflation forecasts for the single currency area on Thursday. But turmoil generated by the US market for high-risk mortgages, also known as the subprime market, caused banks and other lenders to tighten credit, in effect partially fulfilling the rate hike's purpose.

"To some extent, the interbank market has de facto tightened eurozone monetary conditions already," Schmieding said.

AFP