ECB Leaves Rates Unchanged at 4%

The European Central Bank marked a year of unchanged official borrowing costs on Thursday after deciding to leave its main interest rate at 4 per cent.

The widely-expected announcement reflected ECB fears about the eurozone inflation outlook, which has deteriorated in the face of soaring oil and food prices. Eurozone inflation hit a 16-year high of 3.6 per cent in May.

Jean-Claude Trichet, ECB president, is likely later on Thursday to stress the bank’s determination to prevent the current surge in inflation from becoming entrenched when he unveils revised ECB economic forecasts for this year and 2009. These are likely to show inflation in both years exceeding its target of an annual rate below but close” to 2 per cent.

Mr Trichet is unlikely to offer any clues about the direction of the next move in interest rates, however. Financial markets have priced in a rise later this year, but with eurozone growth expected to show clear signs of slowing, many economists believe the ECB could keep rates on hold until well into 2009. Earlier this week, the Paris-based Organisation for Economic Cooperation and Development said it was assuming the ECB would keep interest rates at 4 per cent for 18 months.

So far, the resilience of eurozone economic growth has taken policymakers aback: gross domestic product increased by 0.8 per cent in the first quarter – compared with just 0.2 per cent in the US. But the second quarter is likely to have seen a significant deceleration. In turn, that should reduce inflationary pressures.

Despite their alarm about current inflation rates, ECB officials have taken comfort from the fact that financial markets’ and consumers’ expectations about inflation rates in the medium and longer term have remained consistent with its goal.

In the latest sign that a significant deceleration in growth is in the pipeline, Germany reported a 1.8 per cent fall in industrial orders in April, extending a 0.5 per cent fall in March. Details showed that a steep fall in export orders had only partly been offset by an increase in domestic orders.

ECB Leaves Rates Unchanged at 4%

Financial Times
6/5/2008 6:52:06 AM