Europe central bank rates unchanged

The European Central Bank, meeting in the Greek capital instead of its usual home venue of Frankfurt, has held its key interest rates unchanged.

    Trichet is to explain the reasoning behind decision

    As widely expected, the ECB held the minimum bid rate for its regular refinancing operations steady at 2%, where it has been since June 2003.

    And it also held its two other key rates - the deposit rate and the marginal lending rate - unchanged at 1% and 3% respectively.

    The ECB's decision to maintain the status quo on rates came 45 minutes after the Bank of England also held its own key interest rate steady at 4.50%.
     
    While ECB chief Jean-Claude Trichet was scheduled to explain the reasoning behind the decision at a news conference later on Thursday, it appears that soaring oil prices are increasingly weighing on the growth outlook for the 12-country single currency area.

    Earlier on Thursday, the European Commission in Brussels cut its forecast for area-wide growth this year to 1.2% from 1.6% previously.

    Oil prices

    The European Union's executive arm said the eurozone was emerging from a second-quarter soft spot, but high oil prices could yet derail a nascent recovery.
     
    The ECB governing council normally convenes at its headquarters in Frankfurt for its regular monthly rate-setting meeting.

    High oil prices could yet derail
    a nascent recovery

    But twice a year, it travels to another city in the single currency area and this time it was the turn of Greece, the newest eurozone member, to host the central bank governors of the 12 countries that share the euro.

    The ECB has held its eurozone borrowing costs at their current levels since June 2003.

    Nevertheless, most ECB watchers predict that the guardian of the euro will start tightening monetary conditions next year to keep a lid on inflation once growth picks up again.

    In recent comments, ECB chief Trichet already has raised a warning finger on inflation, saying the euro bank was keeping "particularly vigilant" with regard to possible upside risks to price stability.

    Pressures

    The ECB defines price stability as annual inflation rates close to but just under 2%.

    But the harmonised index of consumer prices (HICP) for the euro area rose by 2.5% on a 12-month basis in September.

    Lowering interest rates could
    weaken the euro

    Inflationary pressures also appear to be building further up the pipeline, with M3 money supply growth, the ECB's preferred gauge of medium-term inflation, accelerating again in August.

    Of particular concern for the bank is the strong growth in private-sector credit and loans for housing purchases, which could be seen as a sign of the emergence of a property bubble in the single currency area.

    Eurozone economy
     
    ECB President Jean-Claude Trichet last month reiterated his call that exports, investment, low interest rates, robust corporate earnings and gradual improvement in consumption should support the euro-zone economy.

    Fighting inflation is the ECB's chief mission, though it also must consider the effect that rates have on growth.

    Ill-timed hikes to combat inflation could dampen growth by raising the cost of borrowing for businesses. Lowering the rates could weaken the euro. 

     

    SOURCE: Agencies


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