Brussels, 02/10/2008 (Agence Europe) - Despite reduced risk of inflation, the European Central Bank (ECB) decided on Thursday 2 October to keep eurozone interest rates unchanged. Minimum bid rates applied to major refinancing operations therefore stay at 4.25% and marginal lending facility rates and facility deposit rates remain unchanged at 5.25% and 3.25% respectively. Although the slowdown in the eurozone economy has contributed to reducing risks to price stability, these risks have not gone away, insisted Jean-Claude Trichet, who addressed a “very clear” message to social partners and governments to avoid stoking up an inflationary spiral.
According to the president, the decision taken by the governing council was made “unanimously”, following “extensive” discussions. Trichet did not hide the fact that a possible reduction in interest rates had also been discussed. However, faced with the recent and increasing turbulence on the financial markets and the possible impact on economic activity and inflation, the ECB sought, above all, to keep inflation expectations firmly anchored. At the end of the meeting, Mr Trichet repeated that this was, “of crucial importance” given the “extraordinarily high level of uncertainty” currently observed. Although the Euro-zone's economic activity is weakening, due to contracting domestic demand and tighter financing conditions, inflation rates are likely to remain “well above” the ECB defined stability objective of 2% but ought to gradually recover in 2009. Mr Trichet explained that 18-24 months will perhaps be necessary to get prices to conform to this objective.
Mr Trichet warned therefore that “upside risks to price stability have diminished somewhat, but they have not disappeared”. With price stability standing at 3.6% in September, the level of inflation is still at a “worrying level” and at this stage it is imperative to prevent second-round effects on prices and wages, explained Mr Trichet. Wage growth has been picking up rather strongly over recent quarters, despite weaker growth in GDP and a slackening off in labour productivity. Growth in unit labour costs has been relatively modest in recent years (1-1.5%) but sharply increased in the second quarter of 2008 to 3.4%. Possible rises in indirect taxes and administered prices could also come into play in addition to wage pressures on prices. Mr Trichet explained that “all stakeholders are facing exceptional challenges and must assume their responsibilities”.
Like Mr Juncker (see other article), Mr Trichet wanted to avoided making any comment before Saturday's meeting in Paris on the European response to the financial crisis, but did reject the idea of resorting to a Paulson-style rescue plan. He said that such a plan does not “correspond to Europe's political structure”, particularly because the EU does not have a “federal budget”. (A.B./transl.rh)