ECB keeps rates on hold, ready to act on oil prices

2nd September 2005, Comments 0 comments

2 September 2005, FRANKFURT - The European Central Bank kept monetary policy on hold Thursday but ECB chief Jean-Claude Trichet made it clear that the bank was ready to act on rates after soaring oil prices forced it raise its inflation forecast and cut its growth projections.

2 September 2005

FRANKFURT - The European Central Bank kept monetary policy on hold Thursday but ECB chief Jean-Claude Trichet made it clear that the bank was ready to act on rates after soaring oil prices forced it raise its inflation forecast and cut its growth projections.

Speaking at a press conference after the meeting of the ECB's 18- head rate-setting council, Trichet said: "We are not promising anything in advance. We can move when we judge it to be appropriate."

However despite the renewed pressure on oil prices as a result of Hurricane Katrina, Trichet said it was too early to say what the economic fall-out might be from the disaster unfolding in southern U.S. states might be.

But underscoring the banks tough stance on inflation, he told reporters: "Today is not a case for increasing rates. All depends on the second-round effects," which include increased wage pressures resulting from the higher oil prices.

"We remain pragmatic," he said, insisting that he was not "pre-announcing a rate increase and certainly not a rate cut."

Interest rates in the 12-member eurozone have remained at an historic low of two per cent since June 2003.

Most analysts expect the ECB to keep rates on hold possibly until the middle of next year at they weigh up the impact of high oil prices on inflation and economic growth in the 12-member eurozone.

Thursday's meeting of the banks governing council also marked the end of the summer slow-down for Europe's financial markets with dealers returning to their desks after their vacations just as soaring oil prices start to cloud the global economic outlook.

It was also the first meeting of the ECB's governing council in two months, following a telephone conference last month.

Indeed, with oil prices having this week hit a record of more than 70 dollars a barrel, rocketing energy costs are placing at risk the renewed sense of optimism about the outlook for the currency bloc's economy.

Since the ECB's last formal meeting in July key economic data and indicators as well rising corporate earnings have been pointing to more prosperous times ahead for the eurozone.

Figures released this week showed unemployment falling in France and Germany, the currency blocs two biggest economies, while a 10 per cent drop in the euro this year has been helping to underpin the regions exports.

Moreover, Trichet said the bank remained confident in its predictions that the eurozone was on course to a pick-up later this year.

"The most recent survey indicators have, on balance, been supportive to the view that economic growth could improve in the second half of 2005, while higher oil prices continue to weigh on demand and confidence," Trichet told reporters.

The ECB now expects growth to be come in at around 1.8 per cent in 2006, compared with its previous forecast of two per cent which it made three months ago.

At the same time, the bank expects inflation to remain above its two per cent target for the rest of year. Eurozone inflation came in at 2.1 in August.

Similarly, the midpoint range for the ECBs inflation projection is 2.2 per cent for 2005 and 1.9 percent in 2006. This compares to two per cent and 1.5 per cent as set out in the banks June projections.

Apart from soaring oil prices, the ECBs hopes of containing inflationary pressures are also facing a challenge as a result the expansion of credit and money supply.

The broad measure of the money supply M3, which the bank sees a key determinate of future inflationary trends, is growing at the fastest pace since October 2003 in July as low interest rates help to fuel a housing boom in France, Ireland and Spain.

DPA

Subject: German news

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