ECB waits for evidence of recovery
3 February 2005, FRANKFURT - The European Central Bank kept rates on hold at a post-war low on Thursday as it sizes up the strength of the economic recovery underway in the 12-member eurozone. Speaking in Frankfurt after the meeting of the bank's 18-head rate-setting council, ECB chief Jean-Claude Trichet reaffirmed the bank's expectations that inflationary pressures will ease and economic growth will pickup as the year unfolds. Many analysts believe that the ECB's assessment of a moderate economic outlook
3 February 2005
FRANKFURT - The European Central Bank kept rates on hold at a post-war low on Thursday as it sizes up the strength of the economic recovery underway in the 12-member eurozone.
Speaking in Frankfurt after the meeting of the bank's 18-head rate-setting council, ECB chief Jean-Claude Trichet reaffirmed the bank's expectations that inflationary pressures will ease and economic growth will pickup as the year unfolds.
Many analysts believe that the ECB's assessment of a moderate economic outlook and a fall in inflation means that it will keep rates steady possibly until the end of the year or even longer before following the lead of other world central banks and tightening monetary policy.
"Looking ahead, the conditions remain in place for economic growth to pick up and become more self-sustained in the course of the year," Trichet told reporters.
"Global growth remains solid, providing a favourable environment for euro area exports," he said, together with an improved outlook for both investment and consumption.
The ECB's announcement on rates came just 24 hours after the U.S. Federal Reserve raised its key interest rate by another 25 percent basis points. The Fed has now raised rates six times since June last year.
Thursday's decision means that the ECB's benchmark refinancing rate has now stood at two per cent for 20 consecutive months with the bank's governing council last changing rates in June 2003 when it delivered a hefty 50 basis points cut in borrowing costs.
But while a fall in the euro has helped to ease some of the pressure on the bank, overhanging the eurozone's economic prospects is the continuing uncertainty caused by volatile global oil prices.
Annual inflation inflation in the eurozone edged up to 2.4 percent in December, from 2.2 per cent in November.
That is above the ECB's 2 percent target with the bank saying that inflation will remain volatile in the medium term but will fall below 2 percent as 2005 progresses.
"High and volatile oil prices and persistent global imbalances pose downside risks to growth," Trichet said.
At the same time, the euro appears to have stabilised at around USD 1.30 after hitting a record high above USD 1.36 in late December with business surveys showing large parts of industry in the 12-member currency bloc shrugging off any worries about exports caused by the common currency's recent strong performance.
Meanwhile, the eurozone's economic picture appears mixed with hard data calling for caution about the region's economic prospects and a more upbeat mood emerging from a raft of economic surveys.
As a reminder of the fragile state of the eurozone's economic upturn, data released this week for the currency bloc's biggest economy, Germany, showed another big jump in unemployment and a surprise fall in retail sales.
Indeed, high unemployment is continuing to dampen consumer demand in key parts of the eurozone with exports having emerged as the major pillar of growth.
Of additional concern on the inflation front to the ECB is the threat posed by a surge in money supply, which rose from six percent in November to 6.4 percent in December.
"This increasingly reflects the stimulative effect of the historically very low level of interest rates in the euro area," said Trichet, with low interest rates helping to drive demand for home loans and fuelling house prices.
"As a result of the persistently strong growth in M3 over the past few years, there remains substantially more liquidity in the euro area than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term and warrants vigilance," he said.
Subject: German news