MercoPress. South Atlantic News Agency

ECB keeps interest rates unchanged at 2%

The Governing Council of the European Central Bank decided Thursday to keep basic interest rates in the Euro zone unchanged at 2% given the moderate growth performance of the economy and the fact domestic inflationary pressures remain contained in the medium term.

"The exceptionally low level of interest rates across the entire maturity spectrum continues to provide considerable support to economic growth in the euro area, which currently shows only moderate dynamics", said ECG president Jean Claude Trichet.

"The moderation in economic activity observed since mid-2004 is partly related to the rise in oil prices. Looking ahead, there is scope for positive fundamental factors to again shape the outlook, assuming that the effects from adverse developments gradually diminish. Notably, global economic activity is expected to remain strong, despite some moderation from the record levels observed last year. This continues to support euro area exports and should have a potential positive impact also on investment. Investment is expected to benefit from robust earnings, improvements in business efficiency and the very favourable financing conditions. At the same time, consumption growth is expected to develop in line with real income growth".

According to the latest data available Euro area real GDP is projected to grow at rates of between 1.1% and 1.7% in 2005, and between 1.5% and 2.5% in 2006. In comparison with the March ECB staff projections, the ranges projected for real GDP growth in 2005 and 2006 has been adjusted slightly downwards.

However Mr. Trichet pointed out that "all in all, our judgement remains that real economic growth will gradually improve over the period ahead. At the same time, recent data have heightened the uncertainties surrounding the short-term evolution of domestic demand, and persistently high oil prices and global imbalances may pose downside risks to the projections for economic growth".

Average annual inflation is seen to lie between 1.8% and 2.2% in 2005, and between 0.9% and 2.1% in 2006. Compared with the ECB staff projections published in March 2005, the inflation projections for 2005 have been revised slightly upwards and for 2006 slightly downwards.

Mr. Trichet further on warned that "taking into account the assumptions underlying the projections, upside risks to the inflation projections prevail. These risks relate notably to future oil price developments, indirect taxes and administered prices. Furthermore, ongoing vigilance is required in order to ensure that past price increases do not lead to second-round effects in wage and price-setting throughout the economy".

"The monetary analysis provides further insight into the risks to price stability over the medium to longer term. Over the past few months, money and credit have continued to grow robustly in the euro area. These developments mainly reflect the stimulative effect of the low level of interest rates in the euro area. The monetary dynamics are driven by the strong growth of the most liquid components of broad money contained in the narrow aggregate M1. At the same time, the euro area private sector's demand for MFI loans, in particular for house purchase, has remained strong".

Finally the ECB president said that regarding fiscal policies, developments in the euro area remain of concern. "While a few countries are succeeding in maintaining sound budgetary positions, in several countries it is essential that fiscal consolidation is given the highest priority in view of the budgetary situation. Moreover, the revised rules and procedures for the Stability and Growth Pact, expected to take effect soon, need to be implemented in a strict manner to ensure credibility and to promote a timely return to sound budgetary positions".