ECB leaves interest rate at 4%


European Central Bank President Jean- Claude Trichet said on July 5 that interest rates are still low enough to support economic growth, suggesting policy makers are considering raising them further.

``Our monetary policy is still on the accommodative side, with overall financing conditions favorable,'' Trichet said at a press conference in Frankfurt today after the bank left its benchmark rate at 4 percent, a six-year high. ``Looking ahead, acting in a firm and timely manner to ensure price stability in the medium run remains warranted.''

The ECB has increased rates eight times since late 2005 as the fastest economic expansion in six years gave companies room to raise prices and encouraged workers to demand more pay. Economists expect the bank to raise borrowing costs for a ninth time in September, a Bloomberg survey shows, and some investors are betting on a 10th quarter-point step by December.

Central banks around the world are raising rates to tackle the threat of accelerating inflation. The Bank of England today increased its benchmark rate by a quarter-point to 5.75 percent, also a six-year high, and Iceland's central bank kept its key rate unchanged at a record 13.3 percent. Bucking the trend, Indonesia's central bank cut its benchmark for the 13th time since May 2006.

Inflation Risks

The U.S. Federal Reserve has kept the benchmark rate at 5.25 percent for a year as economic growth slowed. The Fed said June 28 that inflation is still the ``predominant'' risk facing the world's largest economy.

The implied rate on the three-month Euribor futures contract for December settlement rose 3 basis points today to 4.59 percent. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the single currency's start in 1999.

``We have no pre-commitment and no intention to change the present market expectations,'' Trichet said. ``If I have a message to you, I will ship it without any difficulties. I confirm that we're alert at any time.''

The euro-region economy will expand about 2.6 percent this year, the ECB forecast last month, close to last year's 2.7 percent expansion, which was the fastest since 2000. Inflation may average around 2 percent this year and next, the forecasts show. The bank aims to keep inflation just below 2 percent.

Too Much Money

Money-supply growth, which the ECB uses to gauge future inflation, unexpectedly accelerated to 10.7 percent in May, close to the fastest pace in 24 years.

``Given the continued vigor of money- and credit expansion, there are clear risks to price stability,'' Trichet said.

While euro-region inflation is likely to fall ``slightly'' in the months ahead from 1.9 percent in June, annual gains in consumer prices are seen increasing ``significantly'' toward the end of the year, Trichet said.

``Risks to price stability remain on the upside,'' with high capacity utilization and faster hiring threatening to fuel wage increases. He also mentioned further gains in oil prices as an inflation risk.

Germany's IG Metall, the country's largest union, on May 4 won a 4.1 percent raise for 12 months starting in June for 800,000 workers in the metals industry. German railway workers went on strike this week in pursuit of a 7 percent pay increase.

 


Bloomberg
7/5/2007 7:46:13 AM