MercoPress. South Atlantic News Agency

Euro zone interest rates unchanged at 2.25%

The European Central Bank left interest rates unchanged at 2.25% in its Thursday January 12 meeting. ECB president Jean-Claude Trichet said that on the basis of regular economic and monetary analyses, “we have decided to keep the key ECB interest rates unchanged following the increase of 25 basis points on 1 December 2005”

"Maintaining price stability in the Euro zone over the medium term is our guiding principle, and we will consistently apply it when examining new information, making our judgements and taking decisions", explained Mr. Trichet who added that with interest rates across the whole maturity spectrum remaining historically low in both nominal and real terms, and with the ECB monetary policy stance remaining accommodative, "we will continue to monitor very closely all developments with respect to risks to price stability over the medium term".

Mr. Trichet added that according to information available, real GDP growth in the Euro zone did indeed improve in the second half of 2005, as expected. According to Eurostat's first estimate, real GDP grew at a quarter-on-quarter rate of 0.6% in the third quarter of 2005, compared with 0.4% in the second quarter. The breakdown of GDP data for the third quarter of 2005 confirmed a stronger contribution from domestic demand. Moreover, recent economic indicators and survey data support the view that the expansion of economic activity broadly maintained its momentum in the fourth quarter of 2005 and will continue to do so in the first months of 2006, notwithstanding the impact of high oil prices.

Looking further ahead conditions remain in place for sustained growth of economic activity in line with staff projections and other available forecasts. On the external side, the continued strength of global demand should support euro area exports. On the domestic side, investment should further benefit from continued very favourable financing conditions, robust corporate earnings and gains in corporate efficiency. Consumption growth should gradually rise, broadly in line with expected developments in disposable income.

As to risks for economic growth they relate to high and volatile oil prices, concerns about global imbalances and the level of consumer confidence in the euro area, although the latter is improving.

Price developments also are encouraging since annual HICP inflation was 2.2% in December, according to Eurostat's flash estimate, compared with 2.3% in November and 2.5% in October. This decline was the result of some relaxation of earlier tensions in oil and petrol markets. Nevertheless, annual HICP inflation rates are expected to remain at elevated levels over the short term, mainly on account of the most recent increases in oil prices and some adverse base effects.

"Beyond the short term, indirect effects of past oil price rises on other components of the price index may gradually materialize, and already announced changes to administered prices and indirect taxes can be expected to have an upward impact. Meanwhile, wage increases have remained moderate over recent quarters. All in all, the information available remains consistent with the scenario for price developments as reflected in the December staff projections ".

Risks to this scenario remain on the upside and include further rises in oil prices, additional increases in administered prices and indirect taxes, as well as ? more fundamentally ? potential second-round effects in wage and price-setting behaviour.