ECB Leaves Rates at Seven-Year High


The European Central Bank kept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts.

ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 percent. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows.

The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe's manufacturing and service industries contracted for a second month.

ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today's decision. The Bank of England kept its key rate at 5 percent, while the Czech central bank cut its rate by a quarter point to 3.5 percent.

Inflation in the 15-nation euro region accelerated to 4.1 percent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.

The bank raised its benchmark rate by a quarter point on July 3, citing its concern that a wage-price spiral may develop. Negotiated wages in Germany, Europe's largest economy, jumped 3.5 percent in the year through April, the biggest gain in 12 years. In Italy, wage inflation accelerated to 3.6 percent in June.

Still, Eonia forward contracts show investors scaled back bets on higher ECB rates after a slew of data showed the economy may have contracted in the second quarter. The yield on the March contract was 4.31 percent today, down from 4.61 percent two weeks ago.

Euro-region retail sales fell for a second month in July and German factory orders unexpectedly dropped for a seventh month in June, driven by a slump in exports.

Oil prices have retreated 18 percent since reaching a record $147.27 a barrel on July 11 and money-supply growth, which the ECB uses as a gauge of future inflation, slowed more than economists forecast in June.

The ECB in June forecast euro-region economic expansion of about 1.8 percent this year and 1.5 percent in 2009. After raising rates last month, Trichet said the bank still expects ``moderate, ongoing growth.''

 


TradingEconomics.com, Bloomberg
8/7/2008 5:23:55 AM