ECB likely to hold rates as inflation fears grow

 

The European Central Bank is expected to keep interest rates at 4.0 per cent on Thursday in the face of rising inflation and murky signals about the outlook for economic growth.


Annual inflation hit a record 3.5 per cent in March, despite the dampening effect of the euro hitting all-time highs against the dollar as the US economy worsens and jitters persist on financial markets.

German public-sector workers have also won their biggest pay rise in 16 years and ECB President Jean-Claude Trichet has warned other countries against using the 5.1 per cent deal as a yardstick.

Economists expect Trichet to make his concerns about euro zone inflation clear again at a news conference at 1230 GMT, which follows the 1145 GMT announcement of the Governing Council's rate decision.

All 80 economists polled by Reuters last week expected the ECB to leave its main rate unchanged for a 10th month running at its April policy meeting, and their median expectation of lower rates has now moved back to the second half of the year.

"Given the mix of cross-currents and the difficult balancing act that the ECB is facing, tomorrow's press conference will be very important to show how the central bank is processing the new information," said Silvia Pepino Giuliani, an economist at JPMorgan.

The news conference would show whether the ECB was sticking to the rhetoric it used its March policy statement, or returning to February's somewhat softer stance, she said.

"In February, the ECB tone had sounded somewhat more open-minded, opening the door for markets to price in rate cuts as soon as this quarter. In March, the central bank turned significantly tougher, contributing to the markets postponing easing expectations."

Nick Kounis, an economist at Fortis bank, expected Trichet to present a tough stance, in line with his projection that the ECB will not cut rates at all this year.

"We expect ECB President Trichet to express the Governing Council's concern about recent inflation developments and re-assert its collective view that the risks to inflation over the medium term remain on the upside," he said.

SLOWING GROWTH

Euro zone economic growth had a slower finish to a good year in 2007 as private consumption faltered, data showed on Wednesday, confirming that global financial problems took their toll. Gross domestic product rose 0.4 per cent quarter-on-quarter in October-December, down from 0.7 per cent in the third quarter.

Still, signals for the first quarter have not been entirely on the downside. Just before policymakers began their meeting at 0700 GMT, French industrial production data came in stronger than expected in February, echoing a similar result in Germany.

The International Monetary Fund (IMF) also lowered its economic growth forecast for Europe on Wednesday, warning that the continent's financial markets were exposed to the troubled US housing sector and credit conditions were tightening.

The IMF now expects the euro zone economy to grow a modest 1.4 per cent this year, down from forecasts of 1.6 per cent in January and 2.1 per cent in October. For 2009, it expects growth of just 1.2 per cent. In 2007, the euro area grew 2.6 per cent.

ECB Council members Vitor Constancio of Portugal and Miguel Angel Fernandez Ordonez of Spain said at the weekend that slower growth would eventually ease pressure on prices.

But others including stress upward risks. Trichet said last month that inflation was likely to remain significantly above the ECB's 2 per cent ceiling "for most of the year".

The IMF expected inflation to remain "uncomfortably high" but euro zone price pressures would moderate in 2009. This suggests the ECB "can afford some easing of the policy stance" after keeping rates on hold since June 2007. (Reuters)
 
 
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