Brussels, 06/12/2007 (Agence Europe) - On Thursday 6 December, the European Central Bank (ECB) decided to maintain euro area interest rates as they were. The minimum bid rate remains, then, at 4% and marginal lending facility and deposit facility interest rates at 5% and 3% respectively. Caught between risks of reducing growth and increased inflationary pressure, and confronted with a strong euro and turbulence on the financial markets (the effects of which have perhaps not yet been fully felt), the ECB again stated, “Today is not the right time to change anything,” in the words of Jean-Claude Trichet after the meeting.
In the face of developments apparently contradictory for defining monetary policy, Trichet was careful to balance his message, expressing concern especially over possible repercussions of the rise in consumer prices on wages (second round effects). As they have been saying since their September meeting, immediately after August's financial and stock exchange upsets, the Governing Council wants more information before drawing conclusions on monetary policy, Trichet said on Thursday. Since then, the Bank has put any thoughts of tightening monetary conditions on the back boiler, without suggesting any change of direction. Although, for the moment, there is to be no change, there could be a change of direction in monetary policy if the expected slow down in growth is confirmed and if inflation is contained and proves to be temporary. While price levels will remain uncomfortable over the coming months, this inflationary bump could disappear through the course of next year and 2009. If, around that time, price levels were coming close to the ECB target of an inflation rate of close to but below 2%, there might be a possibility of a reduction in rates. This, at any rate, is a possibility that markets are beginning to build into their thinking and which the ECB forecasts published on Thursday do not rule out.
At the press conference, Trichet, however, wrong footed these expectations, pointing out, as always, that the ECB had no prior agenda and remained constantly on the alert. The governing Council decision was taken by consensus, he told journalists. Had there been any voices in favour of increasing rates? Answer: “There were some”. Indeed, there are strong short-term pressures on inflation and the medium-term risks are still on the upside, he said, stating that the economic fundamentals of the euro area remained healthy. With the re-appreciation of risks on the financial markets continuing and the real impact of the turbulence still unknown, the ECB will keep a close eye on all developments. For the ECB, the growth scenario for the euro area remains close to potential (around 2%). According to the latest ECB forecasts, the rise in GDP is somewhere between 2.4% and 2.8% in 2007, between 1.5% and 2.5% in 2008 (lower than those of September which indicated between 1.8% and 2.8% - see EUROPE 9496) and between 1.6% and 2.6% in 2009. The slow down in economic growth in the US being partially compensated by the performances of the emerging economies, the euro area should continue to benefit from strong external demand and see household consumption strengthen. The risks point to a fall in economic activity, mainly because of changes in finance conditions, oil prices, possible protectionist measures and world imbalances.
Because of the high rises in the cost of crude and food prices, the general level of prices was expected to remain significantly above 2% over the coming months, with moderation only coming gradually in the course of 2008, Trichet went on. The period of temporarily high inflation levels would be a little more protracted than expected, and ECB estimates of inflation were now between 2% and 2.2% for 2007, between 2% and 3% for 2008 (higher than previous forecasts) and between 1.2% and 2.4% for 2009. According to these figures, “We will return to our definition of stability” in 2009, Trichet said and he immediately stated that these hypotheses were all conditional on one key point: wage restraint. For the recent rise in inflation to remain temporary, second round effects had to be avoided, he said, giving assurances that the ECB would do all in its power to avoid these. “To that end, any explicit or de facto indexation of nominal wages to prices should be eliminated,” he added. It was absolutely essential, he stressed. (A.B.)