ECB holds rates

10-01-2008

ECB holds rates
The European Central Bank (ECB) has held interest rates in the eurozone at four per cent.

Despite fears of an economic slowdown – fuelled by the threat of a recession in the US and the infamous credit crunch – the ECB has held firm on its hawkish stance against inflation.

Eurozone inflation now stands at 3.1 per cent – well above the ECB target of two per cent.

Jean-Claude Trichet, president of the ECB, said: "According to the latest information, strong short-term upward pressure on inflation has continued.

"The governing council remains prepared to act pre-emptively so second-round effects and upside risks to price stability over the medium term do not materialise and, consequently, medium and long-term inflation expectations remain firmly anchored in line with price stability."

Inflation in the eurozone is now expected to fall in the later half of 2008.

"Hence, the period of temporarily high rates of inflation would be somewhat more protracted than previously expected," the ECB head said.

Mr Trichet also said the economic fundamentals of the euro area were "sound".

"However, the ongoing reappraisal of risk in financial markets is still accompanied by uncertainty about its potential impact on the real economy and the risks surrounding the outlook for economic activity are on the downside."

Mr Trichet added the effect of the US slowdown would be mitigated by the strength of emerging markets around the world.

Interest rates for the eurozone's 15 countries were last changed in June 2007 – with a 0.25 percentage point increase.

Analysts are split on the future of interest rates in Europe.

Howard Archer, chief European economist at Global Insight, now expects a cut in rates, but not until later in the year.

He said: "Ultimately though, we believe the ECB's next move will be to trim interest rates as slower Eurozone growth and the strong euro dilute
underlying inflationary pressures.

"However, this is unlikely to occur before the second half of the year."

Meanwhile, Laurent Souron, economist at the Centre for Economics and Business Research (Cebr), is forecasting a rate rise before any cuts.

She said: "With inflation at its highest level since the introduction of the single currency in 1999, our view is that the ECB is planning another rate hike.

"We expect that unless inflation were to decrease rapidly, the ECB is likely to take action and conduct another rate hike in the first quarter of 2008."

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