Brussels, 06/03/2008 (Agence Europe) - The European Central Bank (ECB) has again decided to leave things as they are as, although growth forecasts are down, inflationary pressure is on the rise. The result of this is that eurozone interest rates will remain unchanged, said Jean-Claude Trichet on Thursday 6 March. He stresses: “maintaining price stability in the medium term is our primary objective in accordance with our mandate”. The minimal bid rate for tenders applied to main refinancing operations thus remains unchanged at 4% and the interest rates for the marginal lending facility and the deposit facility remain at 5% and 3% respectively.
Noting “strong short-term upward pressure on inflation” in a “context of very vigorous money and credit growth”, Mr Trichet highlighted the risk on prices. With just one indicator, that of price stability, the Governing Council therefore took a decision estimating, moreover, that the fundamental data for the eurozone remain sound and that growth, albeit more moderate, should follow. Despite a surge in the euro compared to the dollar, which increases pressure in favour of rates falling, the Governing Council was unanimous, the ECB president told the press. After his speech, which was again focused on inflationary concerns, the euro reached a record $1.5380. “I have noted with great attention the declarations repeated on the other side of the Atlantic (…) that a strong dollar is in the interest of the United States”, Mr Trichet repeated, sticking to the usual G7 position on exchange rates, and saying that excessive volatility is “not desirable for growth”.
Surveys of business and consumer confidence confirm the downward trend in activity but both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area, where the economy does not suffer from major imbalance. While being dampened by higher commodity prices, consumption growth should continue to contribute to economic expansion, in line with rising employment. ECB services have nonetheless published declining growth projections compared to that in December 2007. According to these new projections, annual GDP growth will be between 1.3% and 2.1% in 2008 (compared to 1.5% and 2.5%d previously) and between 1.3% and 2.3% in 2009 (compared to 1.6% and 2.6%). Prospects for economic growth remain “unusually high”, Mr Trichet noted, saying that further downside risks could stem from the scope for additional commodity prices rises, protectionist pressures and the possibility of disorderly developments owing to global imbalances. He stressed that, although it has been confirmed that the global economy is slowing down, it would be quite normal for a number of prices, including those for oil, to be less pushed upwards, and might even fall. He hoped that this theory would be played out in practice. “But there are cartels [Ed. OPEC]”, he said, so that a return to normal is not necessarily guaranteed. The Organisation of Petrol Exporting Countries (OPEC) had decided on Wednesday to maintain its level of production unchanged, despite reiterated calls from consumer countries in favour of a rise in output to counter the surge in oil prices. The price of a barrel of crude rose above $105 in New York on Thursday for the very first time.
With an inflation rate of 3.2% in February 2008, unchanged compared to January, price developments are worrying. “We expect a more protracted period of relatively high rates of inflation than we did a few months ago”, Mr Trichet said, adding that the price rise must remain “significantly above 2% in the coming months and moderate only gradually later in the year”. ECB services are now reckoning on price rises of between 2.6% and 3.2% in 2008 and between 1.5% and 2.7% in 2009. Reflecting above all the new significant price rises for energy and food products, these figures have clearly been reviewed downward. In December, they were between 2% and 3% for 2008 and between 1.2% and 2.4% for 2009. Mr Trichet went on to point out that there is no link whatsoever between these purely technical assumptions and the political intentions of the ECB when it comes to rates.
It is imperative to avoid second-round effects on price-setting and on wages, Mr Trichet went on to say. He also remains concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral - which is exactly what the ECB dreads most. (A.B.)