MercoPress. South Atlantic News Agency

Euro Zone benchmark interest rate remains unchanged

The European Central Bank left Thursday its benchmark rate unchanged at 2.5% but ECB president Jean Claud Trichet said the bank will do what is necessary to curb inflation, signaling he may support higher interest rates in coming months.

"We will continue to monitor very closely all developments to ensure that risks to price stability over the medium term do not materialize'' said Trichet from ECB headquarters in Frankfurt.

Until December 2005, the ECB had left its rate unchanged at 2% for more than two years but since then, it has made two quarter-point adjustments as Europe's major economies have picked up steam.

As to the state of the Euro zone economy Mr. Trichet said that growth is strengthening and broadening in the first half of 2006 with conditions in place for solid growth over the coming quarters.

"Activity in the world economy remains strong, providing support for euro area exports. Investment activity is expected to remain solid, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, and accumulated and ongoing gains in earnings and business efficiency", indicated the ECB president adding that "consumption growth should also strengthen over time, in line with developments in real disposable income, as the labour market situation continues to gradually improve".

Risks to economic growth appear to be broadly balanced over the shorter term and further ahead "downside risks still relate to potential increases in oil prices and concerns about global imbalances".

Regarding price developments the ECB estimates inflation rates are likely to remain above 2%, although decreasing, depending on the more volatile components of the index.

"Beyond the short term, changes in administered prices and indirect taxes are expected to significantly affect inflation in 2006 and 2007, and an upward impact may also be expected from the indirect effects of past oil price increases. At the same time, wage dynamics in the euro area have remained moderate over recent quarters and growth in wages is expected to remain contained, partly reflecting strong global competitive pressures, particularly in the manufacturing sector"

Finally risks to the outlook for price developments remain on the upside and include "further increases in oil prices, a possibly stronger pass-through of oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and ? more fundamentally ? stronger wage and price developments than expected due to second-round effects of past oil price increases".

To sum up, "annual inflation rates are projected to remain elevated in 2006 and 2007, and the economic analysis indicates that the risks to price stability remain on the upside. Accordingly, the ECB Governing Council will continue to monitor very closely all developments to ensure that risks to price stability do not materialize".