ECB set to keep rates on hold

29th June 2004, Comments 0 comments

29 June 2004 , BERLIN - The European Central Bank is meeting Thursday with a tick up in inflation and signs that economic recovery has been gaining ground in the 12-member eurozone having all but eliminated any hopes of a cut in interest rates. Instead financial markets will be looking to the press conference by ECB chief Jean-Claude Trichet following the meeting of the bank's 18-head rate-setting council for hints about the timing of a possible hike in borrowing costs. "I assume that the upturn will conti

29 June 2004

BERLIN - The European Central Bank is meeting Thursday with a tick up in inflation and signs that economic recovery has been gaining ground in the 12-member eurozone having all but eliminated any hopes of a cut in interest rates.

Instead financial markets will be looking to the press conference by ECB chief Jean-Claude Trichet following the meeting of the bank's 18-head rate-setting council for hints about the timing of a possible hike in borrowing costs.

"I assume that the upturn will continue," said ECB chief economist Otmar Issing last week in comments that are likely to be echoed by Trichet at this week's press conference.

While most analysts believe that the ECB will keep its benchmark refinancing rate on hold at its post-war low of two per cent until the end of the year, a sudden renewed surge in oil prices or evidence that the upswing in the eurozone economy was stronger than expected might force the bank to consider an early move to higher rates.

This is particularly the case, as the push to higher interest rates gains momentum among other key world central banks.

Thursday's meeting of the ECB's governing council is expected to follow a decision Wednesday by the US Federal Reserve to start tightening monetary policy and to lift its main lending rate to 1.25 percent. That would be the first increase in more than four years.

Eurozone inflation has already breached the ECB's two per cent target with the recent jump in energy costs resulting in consumer prices in the economy built around the euro racing ahead to 2.5 percent in May. What is more, most economists predict that data to be released Wednesday will show only a small dip in the June inflation rate.

That said, however, analysts believe that for the time being the ECB will do what does best which is to sit and wait for clear signs that the eurozone's prolonged period of stagnation is now behind it and that recovery has become more entrenched.

"The ECB is likely to continue to talk up the recovery and to warn against second-round effects on inflation," Rainer Guntermann, European economist with Dresdner Kleinwort Wasserstein. "But any interest rate action looks a long way off," he said.

However, in addition to 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 Europe's common currency 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. It is more than a year since the ECB cut rates by a hefty 50 basis points in a bid to shore up eurozone growth.

But still the currency bloc's recovery remains at a delicate stage with high unemployment, talk of welfare reform and now a rise in inflation resulting in consumers being very reluctant to open their wallets and starting to spend.

Furthermore, 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.

DPA

Subject: German news

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