Brussels, 07/02/2008 (Agence Europe) - The European Central Bank is resisting calls to cut interest rates but for how long? Given pressure on prices, vigorous money and credit growth, as well as healthy economic fundamentals, the ECB again opted to keep the same levels. It is, however, very concerned about growth. The ECB board of governors decided, however, on Thursday 7 February, to keep the minimum lending rate to 4%, as well as the marginal facility interest rate and facility deposit rate at 5 and 3% respectively.
Although inflation risks remain high, those for growth have increased significantly, admitted Jean-Claude Trichet at the end of the meeting attended by Commissioner Joaquin Almunia. However, he did explained that, “We were unanimous in keeping the rates the same”, explained the ECB president to the press. He said that there had not been any requests for interest hikes or cuts but that this did not meant they had not discussed the matter. He also said that a possible reduction had not been ruled out, as was the case last month (EUROPE 9577). If we compare current growth to its potential, Juncker said that it was very close or would soon be under its potential level. He is waiting for new forecasts from the ECB next month (in December they forecast a rise in GDP of 2% for this year and 2.1% in 2009). Given the uncertainties surrounding the financial market turbulence impact on the real economy, the ECB would be following developments very closely, he insisted. Economic activity at the end of last year looks like it will be more moderate than during the third quarter of 2007 where growth was 0.8%. Although the slow down in the economies of the main Euro zone trading partners risks having an impact on the GDP of the Euro zone, internal and external demand is expected to continue to support growth, explained Mr Trichet. “The fundamental of the Euro area are sound” and the Euro area economy does not have any major imbalances, there were downside risks to the economy. With an annual inflation rate of 3.2% in January 2008, following 3.1% in December, there was strong upward pressure in the short term. Trichet confirmed that, “inflation rates will most likely remain significantly above 2% in the coming months and moderate only gradually in the further course of 2008. He is still awaiting a prolonged period of temporarily high rates. Rates to inflation mainly include the possibility of an inflationary spiral on wages and prices. Therefore, “it is imperative that all parties concerned meet their responsibilities and that second-round effects on wage and price-setting stemming from current inflation rates can be avoided. The ECB will therefore closely follow wage negotiations in Euro zone member states and any nominal wage indexation on prices is proscribed. Despite his firm stance on inflation, the balanced messaged from the ECB president is encouraging many observers to infer a lowering in interest rates, without still knowing what is in store in the second half of the year. (A.B.)