ECB: no plans for rate change

1st July 2004, Comments 0 comments

1 July 2004, FRANKFURT - The European Central Bank Thursday held its benchmark rate at a post-war low of two per cent in the wake of mixed signals about the 12-member eurozone's economy's recovery and with ECB chief Jean-Claude Trichet insisting that the bank had no plans for changing monetary policy.

1 July 2004

FRANKFURT - The European Central Bank Thursday held its benchmark rate at a post-war low of two per cent in the wake of mixed signals about the 12-member eurozone's economy's recovery and with ECB chief Jean-Claude Trichet insisting that the bank had no plans for changing monetary policy.

But while warning of the risk of stronger inflation on the back of higher energy costs, Trichet painted a relatively upbeat economic outlook for the currency bloc telling reporters following the meeting of the bank's 18-head rate-setting council that economic recovery in the eurozone was continuing.

"Looking ahead, we remain confident that the recovery of economic activity will continue," Trichet said. "The conditions for a broadening and strengthening of the recovery are in place."

But coming just a day after the US Federal Reserve hiked borrowing costs by 25 basis points, the ECB chief stepped back from signalling any move to join the global push to higher interest rates with most economists expecting the Frankfurt-based bank to keep rates on hold until much later in the year as eurozone growth lags behind the US and other parts of the world.

"I don’t want to signal to you that we are doing anything in the future," Trichet said.

"We have no bias. We will remain vigilant," said Trichet who predicted that inflation will remain above the bank's two per cent target for longer than previously expected. This year will mark the fifth consecutive year that inflation breached the ECB's target.

At his press conference, Trichet shrugged off questions as to whether the ECB might follow the lead of other world central banks including the Fed and Bank of England and bring its rate-setting cycle to an end. "We all have our own responsibilities," Trichet said.

Monetary policy in the economy built around Europe's common currency has been on hold for over 12 months with the ECB last cutting rates by a hefty 50 basis points in June last year.

As well as signs of renewed inflationary pressure in the US, growth in the world's biggest economy is forecast to outpace the eurozone this year with the American economy expanding by 4.4 percent and the economy built around the euro chalking up a 1.8 percent growth rate.

In Britain, where the Bank of England has already delivered four rate hikes since November, a strong housing market and buoyant consumer demand are expected to propel the national economy to a growth rate this year of three per cent, resulting in a further tightening of monetary policy this year.

UK rates currently stand at 4.5 percent with the Bank of England's monetary committee due to meet next week.

But some economists are concerned that the export boom which has been the major pillar of the eurozone's economic turnaround could start to run out of steam later this year and before European household began to spend as growth in the US slipped back a notch and the euro renewed its move upwards on global currency markets.

Despite the ECB's claims that the eurozone economy remained on course to a moderate upswing this week, economists believe that it is unlikely that the bank will increase rates until it becomes clear that the recovery is on firmer footing. In particular that unemployment is falling and that the consumer demand is gaining momentum.

However, data released ahead of the ECB meeting confirmed the grim state of private consumption in Germany with retail sales in the eurozone's biggest economy falling 1.7 percent in May from April to record the largest drop since November.

Eurozone inflation data also published ahead of Thursday's ECB meeting did help to ease some of the pressure on the bank's governing council to respond to the risk of high energy costs by possibly advancing rate hike moves. The figures showed consumer prices slipping back to 2.4 percent in June compared to 2.5 percent in May.

But with oil prices having surged earlier this year to record levels, Trichet warned about the potential risk of second-round effects such wage settlements and prices saying that they needed to be monitored closely.

Pointing to declining productivity growth in the eurozone, Trichet also again stressed the need for euro member governments to step up the pace of structural reforms, notably in the labour market.

DPA

Subject: German news

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