Brussels, 24/08/2007 (Agence Europe) - In a press release published on Wednesday 22 August, the European Central Bank (ECB) said that the ECB's Governing Council's position on monetary policy had been expressed by its President on 2 August 2007. The financial crisis over the past fortnight on the international markets due to sub-prime mortgage foreclosures in the United States has not changed the official position of the ECB, proud of its independence. Earlier in the summer, ECB President Jean-Claude Trichet said that the ECB would be very vigilant about price changes and the markets interpreted this as a hint of an interest rate rise in September 2007 (see EUROPE 9482), but in the press release issued on 22 August, the ECB said that it would make an exceptional long-term refinancing of some €40 billion, indicating strains on the monetary markets.
It is difficult at this stage to predict how the ECB governors will react at their meeting on Thursday 6 September. Commentators suggest that making a U-turn on its 2 August statement may cost the bank dear in terms of lost credibility, but it could also be criticised for not demonstrating enough flexibility in the fact of the problems facing various financial institutions (particularly banks) and the potential impact of the crisis on the economy in general because a surprise cut in one of the leading interest rates by the US Federal Reserve (the Fed) managed to boost investor confidence (see EUROPE 9483). Some commentators are predicting a face-saving solution of temporarily postponing the rise in interest rates announced in August.
On Friday 24 August, the French President Nicolas Sarkozy suggested that the ECB should make use of its interest rate weapon, highlighting the 'interesting reaction' of the Fed in the US, according to a French government spokesperson quoted by AFP. More explicitly, French finance minister Christine Lagarde said on Thursday 23 August that a cut in interest rates would certainly help companies and markets at the moment. France will find it even more difficult to meet its 2.25% growth forecasts if the ECB raises the cost of money. (mb)