ECB keeps key interest rate intact

The European Central Bank has kept its key interest rate unchanged at 2% amid slipping economic confidence and weak growth prospects in Europe.

    The European Central Bank's governing council met in Berlin

    The bank's governing council decided on Wednesday in Berlin to leave its key refinancing rate where it has been since June 2003, a decision widely expected by market watchers.

    The latest statistics put inflation in the 12-country euro zone at 2.1% in April, fractionally above the ECB's ceiling of 2%.

    "We continue to see no significant evidence of a build-up of underlying domestic

    inflationary pressures in the euro area," ECB President Jean-Claude Trichet told a news conference after the guardian of the euro held its key rates steady at 2% for the 23rd month in a row.

    "We are in a wait-and-see attitude," Trichet said after the meeting, reiterating his comment from last month that the bank is maintaining "vigilance".
    Wage increases

    "Let us be clear, we are definitely not preparing for a rate cut," Trichet said. "Not

    at all."

    And "over the coming months, annual inflation rates are likely to remain around

    these levels", Trichet said.

    Inflation in the 12-country euro
    zone stood at 2.1% in April

    Wage increases had remained moderate and, "in the context of moderate economic

    growth and weak labour markets, this trend should continue for the time being".

    However, there were still upside risks to price stability, namely high oil prices "and

    their potential to lead to second-round effects stemming from wage and

    price-setting behaviour", Trichet cautioned.

    Money supply growth, which the ECB sees as a key gauge of future inflation, also

    warranted vigilance.

    While the ECB's rate has stayed unchanged, the US Federal Reserve has increased

    rates eight times since last June.

    Weakening growth

    The latest increase came on Tuesday, when the Federal Reserve raised its funds

    rate by a quarter percentage point to 3%.
    Over the past month, however, leading indicators in Europe have pointed to w

    eakening growth, and high oil prices also remain a concern.

    "We continue to see
    no significant evidence
    of a build-up of underlying domestic

    inflationary pressures
    in the euro area"

    Jean-Claude Trichet,
    European Central Bank President

    "Some of the downward risks to economic growth identified earlier, in particular

    those related to persistently high oil prices, appear to have partially materialised

    over the past few months," Trichet said.

    Last week, the European Commission's consumer confidence indicator fell for a

    third straight month.

    The government of Germany, the largest economy in the 12-nation euro zone, cut

    its growth forecast for this year to 1% from 1.6% - though many economists

    believe it will be even lower.

    Chief mission

    Italy cut its growth forecast to 1.2% from 2.1%.

    Meanwhile, inflation in the euro zone was unchanged in April from the previous

    month, at an annual rate of 2.1%.
    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.

    Wednesday's meeting in Berlin is one of two each year that the ECB holds away

    from its Frankfurt headquarters. The bank also moved the meeting forward from its

    usual Thursday date due to the Ascension Day holiday.

    SOURCE: Agencies


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