ECB Firm On Interest Rates; Trichet Says Uncertainty Remains Extraordinarily High

(RTTNews) - Amid fears about the spreading impact of global financial market crisis, the European Central Bank left its interest rates unchanged for the third straight month in October, though the bank’s top official said uncertainty in the 15-nation economy remains high.

At the session held in Frankfurt, the Governing Council maintained its key-lending rate, which is the minimum bid rate on the main refinancing operations. This kept the rate at a seven-year high 4.25%.

The decision to leave rates unchanged was largely expected by economists. The central bank had maintained the rate at 4% from June last year until July of this year, before hiking it to its current level.

The central bank’s president, Jean-Claude Trichet, said uncertainty remains extraordinarily high and a fall in oil price may support gradual economic recovery in 2009.

At the post-meeting press conference, Trichet said the Governing Council discussed the rate cut option today, but the decision to hold rates steady was unanimous. He added that upside risks to price stability have diminished, but not disappeared. Regarding the economic growth, Trichet said downside growth risks have increased. Trichet effectively signaled to the markets that a rate cut may in the cards in the near-term.

The interest rate on the marginal lending facility was held at 5.25%, while the interest rate on the deposit facility was retained at 3.25%.

In September, the ECB had kept its key interest rate on hold after hiking 25 basis points in July to 4.25% amid high inflation and slowing growth in the Eurozone.

While the ECB has kept its key rate relatively high, the central bank in the United States spent most of the year lowering short-term borrowing costs in an attempt to stave off a recession. The benchmark rate in the U.S. stands at 2%, down from a level of 5.25% last September.

Inflation in Europe continues to remain high, though it has eased slightly recently. A flash estimate from the Eurostat had showed that annual inflation slowed to 3.6% in September from 3.8% in August. However, it continued to stay above the ECB target, which is to keep inflation rates “below, but close to 2% over the medium term”. Inflation had peaked to 4% in July, which was the highest since June 1992. The statistical office is scheduled to release the final inflation numbers for September on October 15.

Another price indicator, the producer price index grew at slower annual rate of 8.5% in August, compared to 9.2% in July, official data revealed earlier in the day. On a monthly basis, the industrial producer price index dropped 0.5%, reversing a 1.3% rise in July.

The ECB has a different official mandate than its U.S. counterpart. The U.S. Federal Reserve is charged with both maintaining price stability, meaning fighting inflation, and protecting employment, which means that it also acts to stimulate the economy. The ECB, on the other hand, officially only has to worry about inflation.

Recent data have shown that the Eurozone labor market seems a little gloomier lately, as the jobless rate rose to 7.5% in August and the figure for July underwent upward revision to 7.3% from 7.4%. In August, the number of unemployed in the Eurozone rose by 90,000 from July and by 272,000 from August 2007. There were 11.596 million unemployed in Eurozone in August.

Amid the global financial market crisis, the ECB has been pumping billions of dollars in a bid to boost liquidity in the euro area money markets. Trichet said the availability of bank credit in the euro area has, as yet, not been significantly affected by the ongoing financial tensions. However, he noted that the gradual moderation of growth in loans continued in the August data, as previously anticipated, with corporate demand for credit slowing.

The euro area economy had shrunk in the second quarter for the first time since the launch of Euro nearly a decade ago. The EU15 nations had contracted 0.2% quarter-on-quarter in the second quarter, reversing a 0.7% expansion recorded in the first quarter. Earlier in the September, the European Commission had revised down the euro area economic growth forecast for 2008 to 1.3% from its earlier prediction of 1.7%.

Reinforcing fears of recession, the Eurozone economic sentiment in September weakened to the lowest since 2001. A survey report released by the European Commission had revealed that the economic sentiment weakened to 87.7 in September from 88.5 in August.

The overall decrease in sentiment was characterized by a fall in confidence in industry, services and construction. The industrial confidence index stood at minus 12, down from minus 9 in August. The indicator measuring services confidence fell to zero and that for the construction sector slid to minus 16.

Results of a survey showed that decline in the Eurozone manufacturing sector deepened as new orders and backlog of orders fell significantly. A final report from the Markit Economics showed that the Eurozone manufacturing purchasing managers’ index fell to a seven-year low in September.

For comments and feedback: contact editorial@rttnews.com

Posted in Categories: Economy, Eurozone, Forex, Releases, Stocks, USA.