The ECB’s main interest rate has remained at 4 per cent since last June as the central bank has grappled with an uncomfortable combination of slowing economic growth and high inflation.
But the euro’s rise above $1.53 for the first time has complicated the central bank’s task, threatening increased political pressure for lower eurozone borrowing costs.
Jean-Claude Trichet, ECB president, will have a chance to comment on the euro at a press conference this afternoon in Frankfurt. He will also present fresh forecasts for the eurozone economy, which are expected to revise down projections for growth but raise those for inflation.
Last month, Mr Trichet opened the door to possible interest rate cuts later this year, when he dropped previous language that had appeared to rule-out such an option. But data since then has shown little relief on the inflation front, which remained in February at 3.2 per cent – the highest for 14 years. Soaring food prices are a particular concern of the ECB.
The Frankfurt-based institution’s strategy, which makes combating inflation its top priority, has contrasted with that of the US Federal Reserve, which has cut US interest rates to help boost economic growth.
On the growth outlook, the ECB has so far remained relatively optimistic. It argues that the financial market turmoil is unlikely to have a sizeable impact and has played down fears of a credit crunch”. But gloom about the outlook will be intensified by an unexpected fall in German manufacturing orders in January. The 1.5 per cent drop suggested the industrial recovery in Europe’s largest economy might be losing momentum. At the same time, economic sentiment surveys have pointed to a significant slowdown ahead in Spain and Italy.