By Jennifer Yousfi
Despite economic contraction in the second quarter, the European Central Bank (ECB) yesterday (Thursday) maintained its hawkish stance on inflation.
Led by President Jean-Claude Trichet, the ECB's monetary policy committee voted to hold interest rates steady at 4.25%.
"Upside risks to price stability prevail," Trichet said at a press conference in Frankfurt after voting to keep the rate at its seven-year high, Bloomberg News reported. "We're resolute in our determination to keep inflation expectations in line with price stability."
In July, the ECB increased its key interest rate by 25 basis points to its current level from 4.0% in hopes of curtailing second-round inflation effects.
But the Eurozone economy, which covers the 15 nations that share the euro currency, contracted 0.2% in the second quarter, according to Eurostat. And due to weakening in the Eurozone economy and a faltering euro that is at a seven-month low versus the dollar, many traders and investors had hoped for an easing of rates.
"Upon leaving rates at 4.25 percent this Thursday, the ECB will probably refute market hopes for a rate cut in the near future," Bank of America Corp. (BAC) Economist Holger Schmieding said in a research note.
The ECB also revised its outlook for economic growth down, moving its forecast for 2008 to 1.4% from 1.8% and its forecast for 2009 to 1.2% from 1.5%.
Still, while inflation has begun to moderate, it is still at 3.8%, well above the ECB's target rate of 2.0%. And Trichet firmly believes combating inflation must be the central bank's top priority.
"There is particularly a very strong concern that the emergence of broad-based second-round effects in price and wage-setting behavior could add significantly to inflationary pressures," Trichet said at the press conference. The ECB is watching current wage talks with several labor unions "with particular attention."
The Bank of England (BOE) also voted yesterday to hold interest rates steady.
News and Related Story Links:
- Bloomberg News:
- Trichet Focused on Inflation Even as Growth Slows
- The Associated Press: