Brussels, 10/01/2008 (Agence Europe) - On Thursday 10 January, the European Central Bank (ECB) decided to leave interest rates in the euro area unchanged. The decision was accompanied by a strong message from the Governing Council on second round effects, according to Jean-Claude Trichet, and was only taken after careful consideration of the pros and cons of the only two options currently available: increasing rates or keeping them unchanged. The ECB is keeping a careful eye on things, Trichet said firmly at the press conference following the meeting, stressing, as expected, the risks of wage increases resulting in an inflationary spiral. The rate applied to refinancing operations remains at 4% and interest rates on the marginal lending facility and the deposit facility stay at 5% and 3% respectively.
The strong upward pressure on inflation has continued, with an annual rate of 3.1% in December 2007, and the ECB is ready to “act pre-emptively” to avoid second round effects, Trichet said. Anchoring inflation expectation is “of the highest priority to the Governing Council” and it is absolutely essential to avoid the current “bump” becoming long lasting, he said. He indicated that the annual rate of inflation was expected to remain “significantly above 2% in the coming months and is likely to moderate only gradually in the course of 2008”, hence the period of temporarily higher rates of inflation would be somewhat longer than expected. The expectation of a moderation in the general price level remains assumes a reversal of the recent rises in commodity prices and that recent increases in oil and food prices do not lead to second round effects on wages and prices setting. “We will not allow these risks to materialise,” he went on, and he said the ECB would watch euro area wage negotiations very carefully. He pointed out that any indexation scheme of nominal wages should be eliminated. While the fundamentals of the euro area are “sound”, major corrections related to the mortgage market crisis are now underway, he stated, acknowledging that risks were becoming stronger.
Trichet also announced that the ECB, along with US Federal Reserve will inject additional liquidity to calm tension on the financial markets. Coming on 17 and 31 January, these transactions will involve the same amounts and will be conducted according to the same procedures as those of December 2007, he said. At the time, the ECB, along with other major world central banks, decided to inject $10 billion worth each of liquidity for 28- and 35-day periods. (A.B.)