ABN AMRO Bank NV cut its forecast for European Central Bank interest rates, the third bank to do so since last week's threat by ECB President Jean-Claude Trichet to raise borrowing costs.
ABN Amro said the Frankfurt-based ECB will keep the benchmark rate at four percent this year, Bloomberg News reported. Previously, ABN Amro had predicted two increases. Last week, after Trichet promised to act "preemptively" to tame inflation, Societe Generale said the key rate would remain unchanged after previously predicting an increase. Dresdner Kleinwort said it now expects a rate cut.
"I know the ECB likes to talk tough but I'm not convinced that will be followed with tough deeds," said Dario Perkins, the author of the ABN Amro note. "With the economy slowing and the currency continuing to appreciate, they'll remain fairly pragmatic."
The ECB left rates unchanged on January 10 as slowing economic growth prevented it from acting against faster inflation.
Still, Trichet and fellow council member Axel Weber said the bank would have to raise borrowing costs if workers demand bigger pay increases to compensate for the higher living expenses and trigger a wage-price spiral.
The inflation rate in the euro area, which the ECB aims to keep just below two percent, held at 3.1 percent in December. That's the fastest pace in more than six years. The central bank predicts inflation will average about 2.5 percent this year after 2.1 percent in 2007. It would be the ninth successive year the bank has failed to meet its target.