ECB holds rates despite inflation risks
In a widely expected move, the European Central Bank has left its chief lending rate unchanged at 4% today, despite concerns that inflation is rearing its ugly head again.
The rising cost of food items such as milk and butter has lifted inflation to an uncomfortable 2.6% in Europe, far above the ECB’s stated target of 2%. And with oil creeping ever closer to $100 a barrel, some members of the council are pushing for a hike when they meet again in December, said Simone Meier on Bloomberg.
But with the ongoing credit crisis and a slumping US economy hobbling the eurozone’s growth prospects, the hawks aren’t likely to win out, said Joerg Kraemer, chief economist at Commerzbank. Europe’s economy is already showing signs of cooling, ¬with manufacturing growing at its slowest pace in more than two years in October, and business confidence slumping for the fifth month in succession. And with the dollar tumbling as the sub-prime monster continues to nip at the financial sector - Citigroup analysts estimate that the subprime bill could yet top $64bn - the ECB is being lumped with a very strong euro, which is hurting exporters in the region.
“Already it is apparent that the economic outlook for next two years will be somewhat less favourable than we expected before the summer,” EU Economic Affairs Commissioner Joaquin Alumina said last month.
So while ECB president Jean Claude Trichet was at pains to emphasise that the bank “stands ready to counter upside risks to price stability,” there was no signal that he planned to lift rates at the meeting in December.
Unfortunately, with problems mounting for the eurozone, that doesn¹t leave him with much of a window to stamp out inflation, says Jonathan Loynes in a Capital Economics comment:¬ “it could be December or never”.
