March 3 (Bloomberg) -- The European Central Bank kept borrowing costs at a six-decade low amid slowing economic growth and inflation in the 12 nations sharing the euro.

The Frankfurt-based ECB held its benchmark lending rate at 2 percent for a 22nd month, as predicted by all 34 economists surveyed by Bloomberg. ECB President Jean-Claude Trichet will present the bank's latest growth and inflation forecasts and explain the rate decision at a press conference at 2:30 p.m.

Growth in the $10 trillion economy slowed in the second half of last year as the euro's appreciation crimped exports and rising unemployment and oil prices tempered investment and spending. With companies including Royal KPN NV, the largest Dutch phone company, announcing more job cuts this week, consumer demand may struggle to compensate for slowing exports this year.

``Growth prospects are still very, very modest'' and ``inflation is surprising on the downside,'' said James Nixon, an economist at Barclays Capital in London who used to work as a forecaster at the ECB. ``The ECB will have to see growth picking up for two quarters running before they raise rates.''

Growth in the euro region is forecast to trail that of the U.S. for a 13th year in 14 in 2005. The Federal Reserve has raised rates six time since June to 2.5 percent and investors expect further increases. The difference between the yield on the U.S. 10- year Treasury bond and comparable German security has widened to 60 basis points, double the average of the past 12 months.

`Unconvincing Recovery'

Adding to evidence that growth may slow this year from last year's 2 percent, expansion in the service industries cooled in February, a survey by NTC Research published today showed. Business confidence in the euro region dropped to an 11-month low last month, a report by the European Commission showed Feb. 28.

``The unconvincing recovery continues,'' said Jonathan Hoffman, chief European economist at Royal Bank of Scotland Plc in London. ``I think Trichet will have to struggle to find a reason not to sound very dovish.''

The ECB has cut its 2005 growth forecast to about 1.6 percent from 1.9 percent previously, and its inflation projection to about 1.9 percent from 2 percent, Market News International reported yesterday, citing unidentified people at the bank.

Providing the bank with scope to keep rates on hold, the inflation rate in the euro region has fallen back to its 2 percent limit and dropped below that threshold for the first time in 10 months in January.

Job Cuts, Euro

Rising unemployment is holding back the pace of expansion in Europe. The number of jobseekers in Germany, Europe's biggest economy, rose to a postwar high of 4.88 million in February. In France, the second-biggest economy in the euro region, the jobless rate rose to a five-year high of 10 percent in January.

Royal KPN said March 1 it plans to cut as many as 5,250 jobs, or about a fifth of the total, by the end of 2007 to lower costs and make up for slowing sales. HVB Group, Germany's second-largest bank by assets, said Feb. 24 it plans to eliminate as many as 2,400 jobs this year to cut costs and boost profit.

Adding to risks, the euro has gained almost 9 percent in the past six months, to $1.3137 at 12:50 p.m. in Frankfurt. It reached a record $1.3666 on Dec. 30, making exports more expensive and eroding the value of dollar-based sales for European companies.

``The economy still depends quite a bit on exports,'' said Ulrich Kater, chief economist at DekaBank Deutsche Girozentrale in Frankfurt and co-author of a book on the ECB. Still, he said, ``we may see in the coming months that the economy isn't doing so badly, after some initial problems at the start of the year.''

Retail Rebound

There are signs that growth will accelerate from the quarterly pace of 0.2 percent in the fourth quarter. German retail sales rose the most in seven months in January as tax cuts boosted incomes and consumer confidence. Spending on manufactured goods in France jumped and consumer sentiment in Italy improved.

While job cuts have clouded the outlook for consumer spending, they boosted optimism among investors in the euro area that companies will be able to boost profits. The Dow Jones Stoxx 600 Index, a benchmark for the region, has rallied 5.9 percent so far this year and is trading near a 33-month high.

Growth in the euro countries may be ``slightly lower than in 2004,'' when the economy expanded 2 percent, ECB council member Nicholas Garganas said this week. Global growth ``is expected to continue in 2005, but at a slightly slower pace.''

The Swiss economy, Europe's eighth largest, unexpectedly shrank for the first time in almost two years in the fourth quarter as slowing global demand crimped exports and companies trimmed spending, a report today showed. Switzerland sells about two-thirds of its exports to the countries that use the euro.

Diverging Economies

Complicating the ECB's decisions on policy is the divergence in growth rates across economies in the euro region. The economies of Germany and Italy, which account for about half the euro region, contracted in the fourth quarter. In France and Spain, growth gathered pace and house prices jumped.

``If there's one thing that would make them raise rates, it's excess money supply feeding into asset prices and eventually into inflation,'' said Rajeev de Mello, who helps manage around $8 billion in European bonds at Pictet & Cie. in Geneva.

Money supply growth, the bank's measure of future inflation, accelerated to the fastest pace in more than a year in January.

Rising oil costs may exacerbate the ECB's dilemma because they threaten to boost inflation while crimping growth. Brent crude futures rose to a four-month high of $51.50 today. A barrel of Brent cost $51.25 at 1:15 p.m. in London.

Investors expect the ECB to lift borrowing costs by the end of the third quarter, interest rate futures trading shows. The implied rate on the three-month Euribor contract for September settlement was 2.37 percent today.

The contracts settle to the three-month inter-bank lending rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. That rate was 2.14 percent.

To contact the reporter on this story: Christian Baumgaertel in Frankfurt at cbaumgaertel@bloomberg.net.

Last Updated: March 3, 2005 07:45 EST