Dogged inflation to keep ECB interest rate at 4.0 pc

June 4, 2008
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FRANKFURT, June 4 – The European Central Bank is almost certain to keep its key interest rate at 4.0 percent on Thursday given record inflation and signs of resilient economic growth, analysts say.

The ECB governing council gathers here Thursday for its monthly rate-setting consultation, 10 years after the bank was created and one year after it raised the eurozone benchmark interest rate to its present level.

Economists said they expected the central bank to leave its main refinancing rate unchanged.

"The ECB will surely keep rates on hold on Thursday," said Julian Jessop at Capital Economics.

Nikolaus Keis of UniCredit Markets added: "Inflation risks are too great a threat and the economy remains quite resilient so far."

In May, eurozone inflation shot back up to a record 3.6 percent, far above the ECB\’s target of just below two percent, owing mainly to persistently high energy and food prices.

The bank\’s principal task is to keep prices from spiralling out of control, and president Jean-Claude Trichet told an ECB ceremony on Monday: "We will be faithful to the primary mandate given to us by the (Maastricht) Treaty.

"We know that our fellow citizens are asking us to deliver price stability."

Eurozone finance and political leaders gathered earlier this week in Frankfurt to mark the bank\’s first decade and many guests backed its undaunted quest for price stability via monetary policies that others deem too restrictive.

US and British central banks have lowered their lending rates to 2.0 percent and 5.0 percent, respectively, to underpin growth threatened by housing crises following the collapse of the US market for high risk, or subprime, mortgages last August, and a subsequent tightening of credit.

Some European politicians initially urged the ECB to follow suit but muted their calls as inflation leapt higher earlier this year.

Even the International Monetary Fund, which had suggested the bank had ample room to cut the cost of borrowing, said Monday: "It is appropriate to keep policy rates on hold" in light of persistently upward price pressures.

The IMF also revised its eurozone growth forecast higher, saying it now expected the economy to expand by around 1.75 percent in 2008 and 1.25 percent in 2009.

In April, the Fund had cut its growth forecast to 1.4 percent and 1.2 percent owing to the global financial crisis.

On Wednesday, the European Union revised first quarter eurozone growth figure slightly higher to 0.8 percent from 0.7 percent, giving double the level posted in the last three months of 2007.

Meanwhile, the IMF estimated eurozone inflation would remain strong in 2008 but "gradually return to below 2.0 percent in late 2009."

"The strength of both activity and price pressures in the eurozone leaves the ECB with a relatively straightforward job," said Capital Economics\’s top European economist, Jonathan Loynes.

Many analysts expect interest rates to come down once inflation has eased but some have begun to hedge their bets in light of the latest forecasts.

The ECB will also release Thursday quarterly forecasts by its own staff which are expected to indicate slower growth this year and higher inflation in 2009 than suggested in March estimates.

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