Brussels, 06/06/2007 (Agence Europe) - On Wednesday the European Central Bank (ECB) revealed the new Euro zone interest rates that on 13 June would see the maximum bid rate applied to refinancing operations rise to 4%. Marginal loan and deposit facilities now stand at 5% and 3% respectively. This 25 base point rise, the eighth since December 2005, was expected. According to Jean-Claude Trichet's explanations to the press, this is not expected to be the last, even if the timetable has still not be set out.
Wednesday's decision can be explained by continuing upward price stability risks in a context of solid economic growth and “overall favourable financing conditions”, explained the ECB president at the end of the Board of Governors' meeting. After this adjustment, monetary policy is still “on the accommodative side”, Mr Trichet immediately declared. However, he did not describe the current main rates as “moderate” which he had done in May. This would suggest doubts about the date for further monetary tightening, which some market actors were expecting next September. Similarly, Trichet has still not at this stage planned for a press conference in August. This is certainly not planned for this time of year but the Frankfurt institution generally uses this exercise to carefully inform the markets of its intentions for the following month. Refusing to offer further explanations, Trichet intends to take strong action in time to ensure price stability and closely monitor future developments.
The economy of the Euro zone continues to expand at a significantly more sustained pace than expected a year ago and confidence survey suggest that solid growth will continue into the second quarter (after 0.6% in the first quarter of the year), declared Trichet. World economic activity, more balanced geographically, is still Euro zone export friendly and is expected to maintain a relatively strong dynamic in internal investment demand. Consumption is also expected to be sustained through available income developments, taking into account the improved conditions of the labour market. ECB services also slightly revised their Euro zone growth forecasts upwards for this year (between 2.3% and 2.9%) but produced more moderate forecasts for 2008 (between 1.8% and 2.8%) following oil price rises in recent months (again around $70 a barrel). In the short term, the risks are balanced overall but remain downward in the medium and long term, explained Trichet, citing crude oil prices, the haphazard development in world imbalances, possible protectionist measures and a change in expectations on the financial markets as the main risks.
Although inflation in May remained unchanged compared to April (1.9%), the profile for rates is being influenced by current and past oil price developments. Price levels are expected to fall slightly in coming months before significant rises at the end of the year, explained Trichet, who announced that ECB services were now counting on inflations rates of between 1.8% and 2.2% in 2007 and between 1.4% and 2.6% in 2008 (as opposed to respective bands of 1.5% and 2.1% and 1.4% and 2.6% in March forecasts). Medium term risks remain upward, he indicated, judging that stronger wage developments than expected would create risks that were significantly upwards with regard to prices. It is essential that wage agreements are, “sufficiently differentiated to take into account price competitiveness positions, the still high level of unemployment in may economies and sector-specific productivity developments”. (ab)