View Mobile Site
  • Bookmark and Share

European Central Bank president says bank ready to counter inflation, preemptively if need be

Text Size: Small Large Medium
Posted: January 10, 2008 3:50 p.m.
Updated: January 25, 2008 5:00 a.m.
    LONDON — The European Central Bank and the Bank of England kept their benchmark interest rates on hold Thursday, both torn between the opposing challenges of higher inflation and worries about economic growth.
    Those two factors could put the central banks on different paths in the coming months, with the ECB striking a hawkish note in the face of strong euro-zone inflation while the Bank of England is widely expected to deliver a cut next month to restore shaky consumer confidence.
    ECB President Jean-Claude Trichet said the bank ‘‘remains prepared to act preemptively’’ to keep inflation in check, a statement economists interpreted as the bank retaining its holding stance while leaving the door open for a potential interest rate rise later this year.
    The ECB is concerned that sharp rises in food and energy prices will turn into broader and more persistent inflation if workers obtain higher wages and producers begin to transfer higher costs to consumers.
    ‘‘We are in the position of total alertness ... and won’t tolerate this risk to materialize,’’ Trichet said in Frankfurt after the bank announced its decision to keep its key interest unchanged at 4 percent.
    The bank’s concerns about inflation carry intense weight given that it sets monetary policy for Germany, France and 13 other countries home to 318 million residents, which account for more than 15 percent of the world’s gross domestic product.
    The ECB faces inflation estimated at 3.1 percent — well above its guideline of just under 2 percent — but it also must contend with sliding business and consumer confidence thanks to the global credit crisis.
    Rate increases to rein in inflation can also restrain economic growth and fears of an economic malaise could be enough to discourage the bank from lifting rates in the near term.
    ‘‘In line with the market we expect no change in ECB rates this year, with Trichet, et al, happy to let further U.S. monetary policy easing prop up global demand,’’ said Calyon economist Stuart Bennett.
    While the ECB has held rates steady for seven months since it raised borrowing costs in June 2007, the U.S. Federal Reserve has cut its key rate three times over recent months to 4.25 percent and analysts there believe another half a percentage point cut is likely.
    British policymakers, meanwhile, are dealing with mirror image of the ECB’s concerns.
    Economists had expected the bank’s decision to hold rates steady at 5.5 percent to be a close call and most now expect a cut next month as fears about a slowing domestic economy outweigh concerns about potential rising inflation.
    Already feeling the effects of a series of rate hikes last year, British consumers have been seriously rattled by the credit squeeze sparked by the collapse of the U.S. subprime mortgage market.
    Soaring oil prices and rising food and energy costs have prompted the Bank of England to keep a close eye on inflation, but it is currently running closer to target — at 2.1 percent it is just over the government-set goal of 2 percent or less — than in the euro-zone.
    ‘‘We suspect that the vote to leave interest rates unchanged today was extremely close, and we believe it is highly probable that the Bank of England will cut interest rates by a further 25 basis points to 5.25 percent in February as evidence mounts that the U.K. economy is faltering,’’ said Global Insight economist Howard Archer.
    The bank’s decision to stay its hand on Thursday allows it to assess the impact of last month’s quarter of a percentage point cut on key indicators such as retail spending and the housing market.
    Ian Kernohan, an economist at Royal London Asset Management, said that the bank could plump for a more drastic half a percentage point cut to 5 percent in February ‘‘depending on how bad the news is over the next few weeks.’’
    Analysts added that the bank may have shied away from sending a panic signal to the markets with a second cut in as many months — the last time it made consecutive monthly cuts was in the aftermath of the Sept. 11 terror attacks in the United States.
    The bank’s nine-strong monetary policy committee may also have wanted to assert its independence after Prime Minister Gordon Brown appeared to support the case for an easing, saying at his monthly news conference earlier this week that Britain’s low inflation rate had given the bank ‘‘flexibility’’ to make its decisions.

SUBSCRIBE to the Statesboro Herald print edition or online e-Edition and get EXCLUSIVE news and information online with complete access to all complete stories on statesboroherald.com. Now you'll have Soundoff, Local Birth Announcements and columnists like Jan Moore, Larry Sheehy, Kathy Bradley, John Bressler and Holli Bragg. Also, Letters to the Editor, Local Editorials and many new exclusive items will all be there just for you! And, when you're away from home, you can read the paper page by page anywhere, anytime from your computer with your subscription.

COMMENTS

SUBMIT A COMMENT

Commenting is not available.

Hot Topics

Most Popular

Commenting not available.

Please wait ...