ECB Leaves Rates on Hold

The European Central Bank left its main interest rate unchanged on Thursday at a record low of 1 per cent for the 15th consecutive month.

The decision, at a meeting of the ECB’s governing council in Frankfurt, was expected. Eurozone inflation has picked up recently but at 1.7 per cent in July was within the ECB’s target of an annual rate below but close” to 2 per cent.

With the economic recovery across the 16-country region remaining weak, inflationary pressures in the pipeline appear firmly under control, and financial markets have not priced in a rise in ECB interest rates until well into 2011.

Extended periods of unchanged interest rates have become part of the ECB’s tradition since it was formed 12 years ago. The main policy rate was left unchanged at 2 per cent for more than two years prior to December 2005, when the ECB last started a policy tightening cycle.

Early last year, as the global economic crisis intensified, the ECB slashed official borrowing costs further and faster than ever before, and also started pumping large amounts of liquidity into the eurozone banking system.

In the US, the Federal Reserve has left open the option of further steps to stimulate the economy, especially if the world slips into a double dip” downturn later this year. But financial markets still believe the next move by the ECB will be to tighten monetary policy. The eurozone’s monetary guardian has voiced little concern about deflation in continental Europe, and after a tense few months Europe’s monetary union appears to have stabilised.

ECB Leaves Rates on Hold

Financial Times
8/5/2010 10:44:06 AM