MercoPress. South Atlantic News Agency

Euro zone interest rate unchanged at 2%.

The European Central Bank decided this Thursday to leave interest rates unchanged at 2%, the lowest in half a century in the area. In its official release the ECB stated that:

"At today's meeting the Governing Council of the ECB decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 2.00%, 3.00% and 1.00% respectively".

Interest rates in the Euro zone remain unchanged since June 2003 and the announcement was expected by financial markets. Last May when the previous meeting of the ECB Governing Council, president Jean-Claude Trichet described the strong oil price rises as a "threat for price stability" but added that the ECB would closely monitor the evolution of the oil and gas markets.

On making this Thursday announcement Mr. Trichet said that "on the basis of the regular economic and monetary analyses, we have confirmed our assessment of last month. While somewhat stronger inflationary pressure is likely to persist over the short term, the outlook still remains in line with price stability over the medium term. Therefore, the Governing Council decided to retain its monetary policy stance, leaving the key ECB interest rates unchanged. By historical standards, interest rates are low, both in nominal and in real terms, also lending support to economic activity. The Governing Council will remain vigilant with regard to all developments which could affect the risks to price stability over the medium term"

"Turning to price developments, there is a need to distinguish between short-term developments and the medium-term trend when assessing risks to price stability. Over the short term, oil prices continue to exert upward pressure on the general price level. According to Eurostat's flash estimate, annual HICP inflation was 2.4% in June, having stood at 2.5% in May. Although oil prices have fallen over the last weeks, markets expect them to remain high for some time. Were this to occur, inflation rates would most likely remain above 2% for longer than previously expected".

"Looking beyond the short term, however, the outlook remains consistent with price stability, provided that wages develop moderately, in line with the latest evidence available. Nevertheless, there are some upside risks to price stability. The strength of global economic dynamism may continue to exert upward pressure on commodity prices, including oil prices. Moreover, following rather strong increases in the past, the further evolution of indirect taxes and administered prices is difficult to incorporate into any forward-looking assessment at this point in time, because such information usually becomes available only later in the year. Against this background, the potential risk of second-round effects via wage and pricing behavior needs to be monitored closely.

Social partners can make an important contribution to facilitating the maintenance of price stability by focusing on the medium-term outlook for price developments rather than on currently observed rates of inflation. This would also be conducive to fostering employment growth. Finally, measures of long-term inflation expectations derived from financial market indicators remain relatively high. While these indicators should be interpreted with caution, their development calls for particular vigilance".