MercoPress. South Atlantic News Agency

Europe's downslide leaves rates unchanged at 2%

The European Central Bank, ECB, decided Wednesday as anticipated to keep interest rates unchanged at 2%, reflecting the poor performance of the Euro-zone economy and low inflationary pressures.

The Euro-zone key rate has been at 2% for two full years (beginning June 2003) although in that time the United States Federal Reserve has steadily raised rates from 1 to 3% and in the United Kingdom basic interest rate has gone from 3,5 to 4,75%.

Since the start of 2001, ECB has changed rates seven times. From 4,5% in May 2001 to 2% in June 2003. The US Federal Reserve in the same period has undergone 21 changes from 6% in January 2001 to 1% in June 2003, before beginning with gradual 0,25% rises driven by inflation fears in mid 2004.

During a press conference in Berlin, ECB president Jean- Claude Trichet on supporting the decision said that the current situation and the short-term outlook for economic activity according to recent data and survey indicators "on balance are on the downside". In the last few months the downward risks to economic growth have materialized particularly those related to "persistently high oil prices".

As to inflation Mr. Trichet underlined that "we continue to see no significant evidence of a build-up of underlying domestic inflationary pressures in the euro area", forecasting that "exceptionally low level of interest rates across the entire maturity spectrum provides considerable support to economic activity in the euro area".

Analyzing the possible evolution of the Euro-zone GDP, Mr. Trichet argued that on the external side "euro area exports should continue to be supported by foreign demand" and on the domestic side, "investment should benefit from the very favourable financing conditions, the robust corporate earnings currently being observed and ongoing improvements in corporate efficiency".

"Consumption growth should evolve broadly in line with expected developments in disposable income" but risks to economic growth continue to be related to oil price developments and global imbalance.

As to price developments, annual inflation was 2.1% in April, unchanged from March, and over the coming months, annual inflation rates are likely to remain around these levels.

In the context of moderate economic growth and weak labour markets the trend should continue and "when looking ahead, we see no significant evidence of underlying domestic inflationary pressures building up in the euro area so that inflation rates should develop in line with price stability", said Mr. Trichet.

Summing up, "the economic analysis suggests that underlying domestic inflationary pressures remain contained, however upside risks to price stability over the medium term need to be monitored closely".

This will strengthen the confidence of investors and consumers in the soundness of economic policies but at the same time, "it is essential to implement, in a strict and timely manner, the revised Stability and Growth Pact procedures, which are soon to enter into force, so as to underpin the credibility of the EU fiscal framework".

Finally Mr. Trichet highlighted that continued reforms will be needed in order to keep up with the unavoidable challenges arising from an ongoing deepening in the division of labour at the global level, rapid technological change and population ageing.

"It is important to explain to the general public that these reforms will progressively deliver higher growth and lead to more job creation, and that, as a result, our societies will be better off. Over recent years, uncertainties surrounding the structural reform agenda in some euro area countries appear to have hindered the necessary improvement in the confidence of consumers and entrepreneurs".