ECONOMY

ECB unanimous on keeping rates at 4 percent

European Central Bank President Jean-Claude Trichet said policymakers had decided unanimously yesterday to leave interest rates at 4.0 percent, as the bank tackles high inflation while economic growth is slowing. In a statement little changed from the previous month’s, Trichet said the ECB’s current policy stance would help it to achieve price stability, although inflation was likely to remain high for some time against a backdrop of turbulent markets. Eurozone inflation eased slightly in April to 3.3 percent from the previous month’s record high, but remains well above the ECB’s 2 percent ceiling and appears to be already taking a toll on consumer spending and confidence. Trichet said economic growth fundamentals were sound, but that there was the danger of a sharper slowdown and higher inflation in the future, he added. «We were unanimous in deciding to leave rates as they are,» he told a news conference. «There was absolutely no call for any thing other than (that) decision.» Over the past month, market interest rate expectations have been buffeted by remarks from ECB policymakers that suggested a split on the best response to the dilemma of tackling inflation while growth slows. No vigilance? Asked if the ECB had permanently ditched references to «vigilance,» a word it used in the past to hint at higher interest rates, Trichet said it could make a reappearance but not now. «I have absolutely no reason to say that vigilance has disappeared from our potential vocabulary. It is an expression we can certainly utilize when we judge it is time to utilize it.» Economists polled by Reuters had been unanimous in expecting the ECB this month to leave rates at 4.0 percent, where they have been since June last year. But most expect two 25 basis point cuts in the second half of 2008, taking the main rate to 3.5 percent by December. However, many have pushed back the timing of the first cut and only a slim majority now sees this coming by September. «The firm anchoring of medium-term inflation expectations remains the highest priority for the Governing Council,» he said. «We believe that the current monetary policy stance will contribute to achieving this objective.» The euro recovered against the dollar during the news conference, after Trichet appeared less dovish than currency traders had expected. This month’s ECB rate meeting was hosted by the Bank of Greece, one of two meetings a year that takes place away from the ECB’s Frankfurt headquarters. Trichet said there could be no complacency on inflation, and that it was too early to draw encouraging conclusions from April’s drop in inflation. «The latest data and survey information on economic activity confirms previous expectations of moderate but ongoing growth in the first half of 2008,» Trichet said. «Overall, the euro area economy has sound fundamentals.» Trichet also reiterated that he was confident the United States stood behind a strong dollar, and hoped markets would take that on board. The euro hit a record high against the dollar last month, but has since slipped. «I also mentioned that I was taking for real and (seriously) what was said by the US authorities – the president, the secretary of the Treasury and the chairman of the Fed. Namely that a strong dollar was in the interest of the United States. «I said that before, I continue to say that and if it is considered by a number of observers… as serious and convincing, I would be happy, of course.»