Eurozone Interest Rates Left Unchanged


Eurozone interest rates have been left unchanged by the European Central Bank as it seeks to bring surging inflation back within its target range.

The decision to leave its main policy rate at 4 per cent was widely-expected after eurozone inflation last month hit a 14-year high of 3.2 per cent. The ECB’s concerns that a temporary rise in price pressures could become longer-lasting are thought to have outweighed fears about growth.

The ECB’s stance has contrasted sharply with the aggressive interest rate cuts announced by the US Federal Reserve.

However, comments by Jean-Claude Trichet, ECB president, later on Thursday will be scrutinised for any sign that the ECB could lower borrowing costs in coming months. Financial markets have priced-in three, quarter-percentage point cuts by the end of this year.

Last month, when interest rates were also left unchanged, Mr Trichet had hinted that the central bank could still raise rates pre-emptively” to head off the inflationary dangers posed by higher wage settlements. The 21-strong ECB governing council had only discussed two possibilities,” he said on January 10, making clear that a cut was not then on the central bank’s agenda.

But since that date, financial markets have seen dramatic falls while economic surveys have pointed to a sharp deterioration in growth across the 15-country eurozone region at the start of this year – especially in the service sector. Some on the governing council are likely to have argued that the recent financial turbulence will help restrain wage demands by trade unions – reducing the need for it to take as hawkish a stance.

Still, signs of a substantial slowdown underway are not yet convincing. Germany reported a smaller than expected fall in manufacturing orders in December. The 1.7 per cent drop followed a 3 per cent rise in November. The Berlin economics ministry said the figure pointed to "positive developments" in industrial production in coming months.

The ECB aims to keep the eurozone’s annual inflation rate below but close” to 2 per cent. It has been outside that range since August last year.


TradingEconomics.com, Financial Times
2/7/2008 6:31:05 AM