ECB signals rates on hold for time being

4 December 2003

FRANKFURT – The European Central Bank left its benchmark interest rate unchanged Thursday with ECB chief Jean-Claude Trichet pointing to mounting evidence that a moderate economic upswing was taking shape but signalling that the bank was in no rush to tighten rates.

Speaking at a press conference following Thursday’s meeting of the ECB-18 head rate-setting council, Trichet said economic activity in the 12-member eurozone had picked up with real growth in the third quarter underpinned by the strong momentum of the world economy.

“Taken together, we look forward to a gradual recovery in the euro area economic growth over the next quarters, leading to a broader and stronger upswing in the course of next year and the year after,” said Trichet who was presiding over his second press conference as ECB president.

But while Trichet said he expected inflationary pressures to ease in the coming months, he stepped back from commenting on the performance of the euro, which has gained about 13 percent against the dollar since the start of the year and hit a new all-time high of more than 1.21 dollars Wednesday.

Trichet insisted that he was not prepared to comment on the day-to-day or week-to-week movements in the currency, adding that like other central bankers he was in favour of a strong currency.

Apart from raising concerns about the outlook for exports, economists say that a further strengthening of the euro could result in a tightening of monetary conditions in the economy built around the euro and as a consequence force the ECB to deliver another rate cut.

The world’s second most powerful central bank after the US Federal Reserve last reduced borrowing costs in June when its cut its benchmark refinancing rate by a hefty 50 basis points official rates down to a post-Second World War low of two percent.

For the moment, however, most economists believe that monetary policy in the eurozone is on hold until the middle of next year while the notoriously cautious ECB weighs up evidence concerning the scale of the economic rebound and the performance of the euro.

That said, however, Trichet indicated the bank did not see any risk of renewed inflationary pressures resulting from the upswing.

“While annual inflation rates are likely to fluctuate around two percent over the coming months a gradual and limited decline should take place later on,” he said.

In his comments to reporters, Trichet was more forthcoming about the ongoing row over Europe’s Stability and Growth Pact, which follows the deal hammered out last week allowing Germany and France to side step hefty fines for overshooting the pact’s tough budgetary rules.

Echoing remarks made by the ECB when the Franco-German deal was announced, Trichet described the move as “deeply regrettable.”

The ECB chief went on to say that the agreement to allow Paris and Berlin to escape fines under the pact risked undermining the credibility and of the institutional structure and the confidence in the euro member states’ public finances.

The Frankfurt-based ECB’s meeting coincided with an announcement in London that the Bank of England had also left its key interest rate unchanged at 3.75 percent.

As a curtain raiser to Thursday’s meeting, the ECB also received more evidence to support its case that the eurozone economy was back on a growth path.

Data released by Germany, the currency bloc’s biggest economy showed a surprising fall of 18,000 in seasonally adjusted unemployment and a 2.7 percent surge in manufacturing orders.

DPA
Subject: German news