ECB Holds Rates Despite Recession Fears

Eurozone interest rates have been left unchanged at 4.25 per cent by the European Central Bank, despite the rapidly-unfolding global financial market crisis and the threat of a eurozone recession.

Thursday’s decision, which had been expected, reflected ECB policymakers’ continuing fears about inflation pressures across the 15-country eurozone – at a time when the macroeconomic impact of financial market turbulence remains uncertain.

The crisis in the banking sector spread to continental Europe this week, with governments having to launch bank rescues in several countries. On Tuesday, Jean-Claude Trichet, ECB president, argued that banks’ efforts to clean up their portfolios and strengthen capital bases, as well as increased risk aversion may have substantial impacts on the real economy that policymakers should be aware of”.

His comments suggested the ECB had become noticeably more pessimistic than previously on eurozone growth prospects, at a time when it was having to step up significantly its emergency liquidity-boosting operations in financial markets.

But the central bank has insisted on a clear separation between measures aimed at resolving tensions in financial markets and its main monetary policy, aimed at combating inflation.

Despite recent falls, the eurozone’s inflation rate of 3.6 per cent remains far above the ECB’s target range of an annual rate below but close” to 2 per cent. ECB policymakers have argued that at times of financial distress it is even more important to keep inflation under control.

The bank, which raised rates as recently as July, sees eurozone costs as less flexible than in the US, justifying a tougher monetary policy stance, especially with crucial wage negotiations looming in the German engineering sector.

Recent economic data suggested that, even before the latest events in the US, there was a high chance of the eurozone reporting for the three months to September a second consecutive quarter of falling gross domestic product – the technical definition of a recession.

ECB Holds Rates Despite Recession Fears, Financial Times
10/2/2008 5:02:13 AM