May 19, 2024

European Central Banks Stand Pat on Rates

The Bank of England also kept its main interest rate and bond purchasing program unchanged despite even worse inflation, amid signs that the British economy was still too weak to cope with higher borrowing costs.

A month after delivering its first rate increase in almost three years, the European Central Bank’s governing council, meeting in Helsinki, left its main policy rate at 1.25 percent. The E.C.B. broke ranks with other major central banks in April when it raised the rate in April from a historic low of 1 percent, citing “upside risks to price stability.”

Jean-Claude Trichet, the E.C.B. president, said at a news conference that the central bank “will continue to monitor very closely” risks of inflation. That is considered to be a code phrase indicating that the E.C.B. will not raise rates at its next meeting in June, but could act as early as July to temper economic growth and ease price pressures.

“This was the right decision, in our view,” Jens Sondergaard, an analyst at Nomura in London, said in a note. “Signaling a more aggressive tightening cycle at this stage is not warranted and would have been a policy mistake.”

At the same time, Mr. Trichet indicated that the E.C.B. remains concerned about signs of higher inflation. He noted that prices in the euro zone rose at an estimated annual rate of 2.8 percent in April after rising 2.7 percent in March, according to official European figures. That is well above the E.C.B.’s target of about 2 percent.

Mr. Trichet also noted that higher energy prices, aggravated by upheaval in the Middle East, are beginning to affect the cost of manufactured goods.

So far E.C.B. policy makers do not seem to have heeded many critics who say it is premature to raise rates when Greece is teetering on the brink of default, and days after Portugal accepted a European rescue package. The E.C.B. is required by its charter to make price stability its top priority.

“We think that tightening monetary policy at this point is a mistake and that the E.C.B. runs the risk of having to reverse the rate increases,” Marie Diron, an economist in Britain who advises the consulting firm Ernst Young, said in a note.

Mr. Trichet expressed concern Thursday that some countries are falling behind in efforts to get their debt under control.

“Current information points to uneven developments in countries’ adherence to the agreed fiscal consolidation plans,” he said. “There is a risk that, in some countries, fiscal balances may fall behind the targets agreed.”

But Mr. Trichet rejected suggestions that Greece should restructure its overwhelming debt load, a scenario regarded as inevitable by many analysts and investors.

“It is not in the cards,” Mr. Trichet said. The heavily indebted countries must rigorously follow the debt-reduction plans they have agreed to, he said.

Still, problems in the so-called peripheral countries will prompt the E.C.B. to raise more rates cautiously than it has in the past, said Jörg Krämer, chief economist at Commerzbank in Frankfurt. The E.C.B. “will take the plight of the ailing peripheral countries into account,” he said in a note.

Economic indicators have been sending mixed signals about the direction of the European economy. Signs of faster growth in France and even Spain have been offset by inklings of slower growth in Germany, as well as a slump in retail spending across the euro area. Mr. Trichet said Thursday that overall growth in the euro area remains solid.

Another source of uncertainty is the rise of the euro against the dollar, which has been fueled in part by expectations of higher interest rates. At about $1.48, the euro is near its highest level compared to the dollar since the end of 2009. A strong euro can hurt growth by making European exports more expensive abroad.

The euro fell about 0.7 cents Thursday following the E.C.B. decision.

Britain’s central bank decided to keep interest rates at a record low of 0.5 percent despite an inflation rate that had reached double the bank’s 2 percent target. Recent economic data showed that growth had slowed, prompting some economists to cut their forecasts and predict a prolonged economic recovery. The Bank of England also kept its bond purchasing program, which is intended to stimulate the economy, at £200 billion, or $331 billion.

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