MercoPress. South Atlantic News Agency

Euro zone rates unchanged; forecast of “weak mid.2008”

The European Central Bank (ECB) has kept its interest rate benchmark unchanged at 4.25% amid signs of slowing economic growth. ECB President Jean-Claude Trichet said growth in the 15-nation bloc had been “particularly weak” in mid-2008.

But he stressed that against the deteriorating outlook, the ECB priority is to maintain price stability as inflation reaches record levels. Mr Trichet said that Euro zone inflation, which has surged above 4%, was likely to remain above the ECB 2% target for some times as a result of sharp increases in food and energy prices. "Annual inflation rates are likely to remain well above levels consistent with price stability over a protracted period of time and risks to price stability in the medium term remain on the upside," he said and stressed the bank's performance. "The information that has become available since our previous meeting has further underpinned the reasoning behind our decision to increase interest rates in July". The ECB last month moved to cool inflation by hiking borrowing costs for the first time in a year to 4.25%. Mr. Trichet warned that spiraling wages to cope with the high costs of food and fuel will only add to further inflationary pressures and said the ECB would monitor the situation. He underlined that the latest economic data point to "a weakening of real GDP growth in mid-2008, which in part was expected after the exceptionally strong growth in the first quarter". Finally Trichet underlined that "against this background and in full accordance with our mandate, we emphasize that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and support sustainable growth and employment". Central banks worldwide are facing the twin threats of accelerating inflation - caused by rising energy and food costs - and slowing economic growth. While tackling inflation remains a key concern of the ECB, analysts have pointed to recent Euro zone figures highlighting how much the area's economy has slowed. The Euro zone services sector contracted at its fastest pace for five years in July, while separate figures showed retail sales for the region in June dropped by 3.1% year-on-year - the biggest fall since 1995. At the same time, recent data has highlighted the extent of inflationary pressures facing policymakers. Euro zone inflation increased to 4.1% in the year to July, the highest rate since the measurements began in 1997. During the press conference, Trichet also lamented the collapse of talks aimed at reaching a new global trade pact late last month. In his statement he called it "a major setback." While the trade talks launched in Doha in 2001 had struggled before, last month's failure was perhaps the most devastating. Negotiators hoped that a deal to open farm and industrial markets would help alleviate rising food prices, tight credit and slowing economic growth.