MercoPress. South Atlantic News Agency

ECB: rates unchanged and “accommodative” monetary policy

The Governing Council of the European Central Bank, ECB left interest rates unchanged at 4% on Thursday, emphasizing monetary policy will be “accommodative” and conditioned to further gathering of information given the current high level of uncertainty in financial markets.

The widely-expected decision in the 13-member area comes as central banks try to prevent market turmoil from turning into a bigger financial crisis. Before the recent volatility, caused by problems in the US housing and mortgage market, rates had been set to rise to 4.25%. Explaining the background to the unanimous decision, ECB president Jean-Claude Trichet said the fundamentals of the Euro zone economy remained strong but the recent turmoil on financial markets meant policymakers needed to proceed with caution. "The financial market volatility and reappraisal of risk in recent weeks have led to an increase in uncertainty," he said adding that "given this high level of uncertainty, it is appropriate to gather additional information and examine new data before deriving further conclusions for monetary policy." Mr Trichet said growth across the Euro zone had slowed during the second quarter but that key indicators such as unemployment remained "favorable". In line with other central banks, the ECB is now more cautious about the economic outlook because of the credit problems in the US and Europe. Central banks in Britain, Canada and Australia have adopted a similar on hold rates policy. The growing opinion is that rates are now likely to stay on hold until the extent of the impact of the US sub-prime crisis on the global economy become clearer. The ECB has raised rates eight times in the past two years as Europe's steady economic recovery has put upward pressure on consumer prices. Addressing the press Trichet said that available information confirmed that "the medium-term outlook for price stability remains subject to upside risks, as identified by both our economic and monetary analyses" with macroeconomic also confirming the strong fundamentals of the Euro area economy. Against this background, "our monetary policy stance is still on the accommodative side with, inter alia, money and credit growth vigorous in the Euro area". However at the same time the financial market volatility and reappraisal of risk of recent weeks have led to an increase in uncertainty and "given this high level of uncertainty, it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy in the context of our medium-term-oriented monetary policy strategy aimed at delivering price stability". Trichet added that ECB policy will be to act in a firm and timely manner to ensure risks to price stability over the medium term do not materialize and that "medium-term inflation expectations remain firmly anchored in line with price stability", which is all the more important at times of financial market volatility and increased uncertainty. Regarding financial markets the ECB also decided on Thursday to conduct a supplementary liquidity-providing longer-term refinancing operation with a maturity of three months. The operation aims to support a normalization of the functioning of the Euro money market and will be conducted "in addition to the regular monthly longer-term refinancing operations, which remain unaffected".