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ECB leaves rates, euro alone
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June 2, 1999: 9:00 a.m. ET
European Central Bank holds rates but bond markets warn of sharp rise ahead
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LONDON (CNNfn) - The European Central Bank left interest rates unchanged at 2.50 percent at its weekly policy meeting in Frankfurt Tuesday. However, it offered no support to halt the downward slide of the euro, which continued to reach record lows.
The single currency's fall has prompted calls for intervention by the ECB and a series of confused signals in response. However, rumors circulated ahead of the ECB meeting that the bank may seek to halt the speculative slide with a surprise quarter-point hike in rates, which bond markets already have priced in.
"We've seen quite a pronounced impact in the bond markets from the euro's fall [and] expect interest rates to go up quite sharply in the euro-zone," said Phyllis Reed, chief international bond strategist at Barclays Capital.
Reed said it would be "incredibly dangerous" for the ECB to try and intervene directly to prop up the euro. "The next line of defense is interest rates," she said. "If they deliver that tightening, then I don't think the euro could survive."
Bond markets already have priced in a 10 basis point increase in rates by September, with euro-zone rates forecast to climb to 3.40 percent by the end of 2001 and 3.90 percent by 2001.
Economists said a rise in rates would kill off meager European economic growth at a time when the U.S. has adopted a tightening monetary bias to cool the U.S. economy. "Given the growth prospects, that would kill any economic recovery in Europe."
A further slowing of growth would leave euro-zone economies unable to meet the budgetary targets set out in the so-called growth and stability pact. This lays down a series of economic requirements for members of the 11-nation single currency zone.
The euro firmed a little in afternoon trading to around $1.385 after earlier reaching $1.0344. 
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European Central Bank
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