Eurozone interest rates to be kept on hold despite slump

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FRANKFURT, Aug 31 (AFP) The European Central Bank (ECB) is widely expected to leave its main lending rate at 4.25 per cent Thursday despite growing signs of a sharp Eurozone economic slowdown, economists say. brThe ECB will also release its latest forecasts for Eurozone inflation and growth, with economists looking for signs that it is fully recognising the worsening trend. brThe bank's growth projections are likely to be distinctly lower, said Commerzbank analyst Michael Schubert. brBut because the upside risks for price stability remain high, the bank will continue to keep all its options open. brInflation in the Eurozone eased to 3.8 per cent in August, down from a record 4.0 per cent in July but still well above the ECB target of just below 2.0 per cent. brWhile oil prices have come off the boil for now, there is concern that wage demands could create a second round of inflation pressures. brEurozone economic activity is now clearly slowing however and pressure will build for the ECB to consider calls for it to loosen monetary policy, partly to help lower the value of the euro against the dollar which should help exports. brThe case for rate easing will intensify, UBS economist Sunil Kapadia forecast. brThe ECB raised its main interest rate in July even though the economy contracted 0.2 per cent in the second quarter-the first time it has done so since the euro's creation in 1999 -- to ensure markets understood it was serious about fighting inflation driven by soaring energy costs. brThe ECB still suspects that wage inflation will intensify, Schubert said, especially since the powerful German IG Metall trade union is determined to seek pay raises of seven to eight per cent when wage talks kick off shortly. brMaintaining high interest rates has kept the single currency strong against the dollar, hurting Eurozone exporters whose wares are more expensive as a result. brIn the United States by contrast, the Federal Reserve most recently held its rates at 2.0 per cent after a series of sharp cuts from September. brSignificantly, the US economy grew a better-than-expected 3.3 per cent in the second quarter as strong exports came through to make up for domestic slack. brThe Bank of England (BoE) was also scheduled to review interest rates Thursday, with analysts forecasting the key rate will stay 5.0 per cent as it balances inflation against growth concerns. brAfter recent data, analysts are now focused on the prospects for slower Eurozone growth as recession fears mount. brBusiness surveys so far suggest that Eurozone GDP (gross domestic product) will fall again in the third quarter, implying that the region is in the midst of a technical recession, said Capital Economics economist Jennifer McKeown. brA recession is commonly defined as two consecutive quarters of economic contraction.