Trichet, King choose status quo

ECB holds rate at 4%, BoE does the same at 5%

 ATHENS: The European Central Bank and Bank of England left benchmark lending rates unchanged at separate meetings on Thursday after policymakers weighed the paramount risk from inflation against weakening economic growth.

ECB governors meeting in Athens maintained the main euro-zone interest rate at 4% while the BoE left Britain’s rate at 5% in London.

ECB president Jean-Claude Trichet said that the bank expected high rates of inflation “for a protracted period of time” and for price rises to moderate “only gradually” over the course of the year.

“Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices,” Trichet told a news conference in Athens following a meeting of the ECB governing council in the Greek capital.

“As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time, before gradually declining again,” he said.

Inflation has remained above 3% for the past six months due to sharp increases in food and energy prices, he said. Recent data showed inflation at 3.3% in April — well above the ECB’s target of just below 2%.

On growth, Trichet said that despite the fact that economic expansion will slow this year, the economic fundamentals of the euro area are “sound”.

He added however: “The uncertainty surrounding this outlook for economic growth remains high, and downside risks prevail. In particular, risks relate to the potential for the financial market turbulence to have a more negative impact on the real economy than previously anticipated.”

ECB governors have kept their key lending rate unchanged since June last year even as the US Federal Reserve has slashed its rate by 325 basis points to 2% and the Bank of England gradually lowered the cost of borrowing in Britain.

Although BoE policymakers kept British rates steady on Thursday, analysts expected them to follow up an April cut with another cut in June.
 
Investec economist Philip Shaw thought British bank officials demonstrated an “aversion to back-to-back cuts, on the grounds that this could boost inflation expectations.” 

As regards the ECB, many analysts expect that once inflation comes off the boil as compelling evidence of an economic slowdown appears, the bank will begin to trim interest rates.

Aurelio Maccario at UniCredit Markets said his bank was confident that “the conditions for entering an accomodating cycle will emerge and that at the end of the year, the central bank will start cutting rates.”