Inflation fears see ECB keep rates on hold
The European Central Bank kept interest rates at a six-year high yesterday to curb inflation, even as the euro's appreciation and a possible US recession threatened to choke economic growth.
The Frankfurt-based ECB left the benchmark refinancing rate at 4 percent.
"Inflation remains the overriding concern for now," said Laurent Bilke, an economist at Lehman Brothers Inc in London who used to work as a forecaster at the ECB.
"But the economic slowdown will eventually force the bank to cut rates."
So far, the euro-area economy is coping with record oil prices, the euro's 17 percent gain against the dollar in the past year and slowing growth in the US, its second-biggest trading partner.
That's allowing ECB President Jean-Claude Trichet to focus on fighting inflation, which at 3.2 percent is running at the fastest pace since the euro's debut in 1999.
Separately, the Bank of England kept its key rate at 5.25 percent after trimming borrowing costs last month.
ECB council member Axel Weber said last week that investors betting on rate cuts in Europe are "clearly" underestimating the threat of inflation, which won't slow as much as previously forecast.
The ECB will revise up its inflation forecasts from 2.5 percent for 2008 and 1.8 percent for 2009, said Eric Nielsen, chief European economist at Goldman Sachs Inc in London. The ECB aims to keep inflation just below 2 percent.
"The 2009 inflation forecast is particularly important because of the risk of them moving all the way to 2 percent, above their target and a huge political message," Nielsen said.
ECB officials including Executive Board member Lorenzo Bini Smaghi have signaled the bank may also revise down its forecasts for economic growth. In December, it expected the economy to expand about 2 percent this year.
Agencies
(China Daily 03/07/2008 page17)
