ECB leaves interest rates on hold

The European Central Bank left its main interest rate unchanged at 4 per cent on Thursday but is expected to signal that at least one more quarter percentage point rise is likely this year– possibly in September.
The decision of the ECB’s governing council was expected but eurozone government bonds hit new session lows after Jean-Claude Trichet, the ECB’s president, reiterated warnings of inflation risks in the eurozone.
He also said the ECB would continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise.
Recent eurozone economic data have beaten expectations and the ECB sees the 13-country region growing at a rate that is likely to fuel inflationary pressures. It remains concerned in particular by fast growth in money supply and credit data.
Since December 2005, the ECB has lifted its main rate eight times by a quarter point. Inflation in the 13-country eurozone, at 1.9 per cent, remains exactly within the ECB’s target of an annual rate “below but close” to 2 per cent. However higher-than-expected oil prices meant that the expected mid-year dip did not materialise, and Mr Trichet is likely to forecast that headline inflation will head higher later this year.
One issue that the ECB’s governing council is likely to have discussed is how it should signal a September rise in interest rates. Previously, Mr Trichet has pledged “strong vigilance” one month ahead of a rise in borrowing costs. The task this time would be more complicated because there is no press conference scheduled for August, when much of Europe is shut for the summer holiday, although on Thursday Mr Trichet said the ECB would hold a teleconference on August 2nd.
A possibility is that Mr Trichet will on Thursday promise to “monitor very closely” inflation developments – a form of words that in the past was used two months ahead of an interest rate increase. However, the ECB has shown signs that it wants to move away from such a mechanical interpretation of such “code words”.
Some economists do not rule out the ECB waiting until October before the next interest rate increase. That would make a further rise in December less likely.