ECB keeps its benchmark rate at six-year high

The European Central Bank kept interest rates at a six-year high yesterday to fight inflation, even as the euro's appreciation and fallout from the US housing slump curb economic growth.

The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent.

With soaring food and energy prices pushing inflation above 3 percent in the 15-nation euro region, the ECB is reluctant to follow the US Federal Reserve in cutting interest rates to shore up economic growth. The International Monetary Fund estimates expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 as the stronger euro hurts exports and the US housing slump triggers a global slowdown.

"While recent data on economic growth have been disappointing, I doubt that we'll get any shift to an easing bias" from the ECB, said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Plc in London. "They're in a wait-and-see mode, looking for news that inflation will decelerate further."

The Bank of England left its key rate at 5 percent yesterday.

Contrast with Fed

Euro-region consumer prices rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left interest rates unchanged since June last year.

By contrast, the Fed has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, attempting to fend off a recession. Federal Reserve Bank of Kansas City President Thomas Hoenig said that "serious" inflation pressures may compel the Fed to increase rates again.

The ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.

Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.

"Inflation could stay at an elevated level for a longer time than previously forecast," said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. "There's clearly a risk that the ECB will cut interest rates later than forecast and less aggressively."

Policymakers including Axel Weber and Juergen Stark have said they're not sure rates are high enough to contain inflation.

"We'll monitor very closely all developments in the coming weeks and decide whether the current level of interest rates ensures we'll meet our objective" of taming inflation, Weber said on April 21.

Agencies

(China Daily 05/09/2008 page16)