MercoPress. South Atlantic News Agency

Euro rate unchanged at 4%, but policy remains “accommodative”

The European Central Bank, as forecasted, kept its key interest rate at 4% on Thursday, but President Jean-Claude Trichet hinted of future rate hikes in response to continued growth in Germany, Italy and other European countries.

The EC sets rates for the 13 countries from Germany to Slovenia that have the Euro as their currency and last hiked rates in June, a quarter-point. ECB has doubled interest rates over the past 19 months in response to strengthening economic growth and declining unemployment, notably in the Euro zone's largest economy, Germany. Estimates from ECB indicate the EU economy is set to grow at around 2.6% in 2007, while Euro-zone unemployment fell to 7% in May from 8% last year. The central bank also has been wary about rapid growth in the money supply, which is growing more than twice as fast as the ECB prefers. "Given the positive economic environment in the Euro area, our monetary policy is still on the accommodative side, with overall financing conditions favorable, money and credit growth vigorous, and liquidity in the Euro area ample," said President Jean-Claude Trichet, in a statement. The rate hikes have come despite inflation's holding below the central-bank target of close to, but not at, 2%. Consumer-level inflation was 1.9% in June, according to a flash estimate for the Eurostat statistics agency. But Trichet is worried about inflation in the medium term, where risks are "on the upside" he said. Mostly, his worries stem from local demand. "As capacity utilization in the Euro area economy is high and labor markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage developments," he said. Still, he used the phrase "monitor closely" to describe ECB's attitude toward price risks. When he has used the phrase "vigilance," that has signaled a rate hike at the next meeting, which in this case will be a conference call among governing council members in August. Given that most in the market expect a September rate hike, Trichet's choice of words wasn't a surprise.