Inflationary pressures in the eurozone are rising and are worrying, European Central Bank President Jean-Claude Trichet said yesterday while stressing that economic fundamentals in the zone are quite sound.
Trichet was speaking after the ECB as well as the Bank of England left benchmark interest rates unchanged.
The ECB left its main short-term lending rate unchanged at 4.25 per cent at a rare August meeting, after raising the rate by 0.25 per cent in July. In London, the BoE also opted for status quo, keeping its key rate at five per cent for the fourth month running.
US Federal Reserve policymakers who wrestled with the same dilemma had left their main rate on hold at two per cent on Tuesday.
Bank of America economist Gilles Moec said he would listen for comments by Trichet that might indicate the bank was now on hold for a while. "We would love to hear Trichet repeat that he has 'no bias'," a remark the ECB chief made already in July and which implied the rates would remain steady, Moec said.
"If he repeats that it would clearly state that he is in a wait-and-see attitude."
That would be consistent with the Bank of America's forecast that "the ECB would stay where it is for quite awhile", Moec added.
The ECB, known as the guardian of the euro, also left its other two key rates – the deposit rate and the marginal lending rate – at 3.25 per cent and 5.25 per cent respectively.
The BoE decided to hang fire as it weighs the conflicting forces of slowing economic growth and high inflation. The widely-expected decision comes as Chancellor Mervyn King, in line with major Western central banks, faces a dilemma between cutting short-term rates to boost growth, or lifting them to check inflation.
"We believe the Bank of England really had little option to keep interest rates at 5.00," said Global Insight economist Howard Archer. "The ever growing likelihood of recession calls for lower interest rates, yet this is precluded by elevated inflation levels and risks."
Lehman Brothers analyst Michael Hume said: "All eyes will now be on next week's Inflation Report for clues about the near-term policy path. We expect a set of forecasts consistent with rates remaining on hold for the time being reflecting a very concerning near-term inflation outlook and the risk that this may lead to second-round effects on wages and prices."
The British central bank gave no reasoning behind its latest decision as is customary when no change is made to the "repo" rate – at which the BoE lends cash to commercial banks.
Instead, economists must wait until August 20 for publication of minutes from the latest two-day meeting of the Bank of England's nine-member monetary policy committee. Prior to yesterday's decision, some analysts had forecast a surprise increase in borrowing costs owing to surging inflation.
Britain's inflation rate spiked to 3.8 per cent in June, almost twice the BoE's official inflation target of 2.0 per cent. Analysts warn that inflation will race even higher in the coming months.
Britain's GDP grew by only 0.2 percent in the April to June period compared with the first three months of 2008. That was the slowest pace of economic growth for more than three years.
The ECB governing council in yesterday's meeting weighed record inflation of 4.1 per cent against clear signs that the 15-nation economy is weakening and might even be falling into recession. The bank has a medium-term inflation target of just below two per cent.