Europe’s Economy Hit Hard by Rapid Rise in Oil

With oil trading well above $50 a barrel, the European Central Bank said Thursday that the high price was “very unwelcome,” pulling down Europe’s growth and pushing up inflation.

“We are now at a level that is very, very high,” Jean-Claude Trichet, the bank’s president, said at a news conference where he announced that the bank would not raise interest rates.
With oil trading well above $50 a barrel, the European Central Bank said Thursday that the high price was “very unwelcome,” pulling down Europe’s growth and pushing up inflation.

“We are now at a level that is very, very high,” Jean-Claude Trichet, the bank’s president, said at a news conference where he announced that the bank would not raise interest rates.

Europe’s economy has shown signs of faltering in recent weeks, most visibly in surveys that report sharp drops in German industrial production and business confidence. On Monday, the European Commission cut its 2005 growth forecast for the 12-nation euro zone to 1.6 percent, from 2 percent.

The drumbeat of bad news has forced the European Central Bank to put off a long-signaled increase in its benchmark rate, which remains at 2 percent, a record low in the post-World War II period. In Britain, which is outside the European monetary union, the Bank of England also voted Thursday to leave its benchmark rate unchanged.

“Oil is by far the biggest threat to the world economy, and it is felt most by the weakest link, the European Union,” said Thomas Mayer, the chief European economist at Deutsche Bank in London.

Mr. Mayer said high oil prices were most likely the main culprit for Germany’s recent spate of bad numbers, including a surprising 2.2 percent decline in industrial production in February. Germany, as a major importer of oil, is particularly sensitive to spikes in the price.

Rising oil prices, however, also stoke inflation, which remains slightly above the 2 percent threshold set by the European Central Bank. The bank is laboring to balance its primary mission – serving as a sentinel against inflation – against its responsibility to foster economic growth.

Mr. Trichet made it clear that the bank still hoped to tighten monetary policy. A rate cut, which some economists advocate, is not an option, he said Thursday. But at the same time, he said the bank’s governors did not discuss raising rates at their monthly policy meeting.

Sifting through the nuances of Mr. Trichet’s pronouncements, most bank watchers now believe that a rate increase will not occur before the summer, and perhaps not until the end of the year.

“The bank’s underlying message is the same, but his tone was somewhat less hawkish,” said J