MercoPress. South Atlantic News Agency

Euro zone leaves rates unchanged at 4%; inflation priority

Fearing the risks to price stability over the medium term even when the economic fundamentals of the Euro area are sound, the European Central Bank (ECB) Governing Council kept this Thursday interest rates unchanged at 4%.

"This decision reflects our assessment that risks to price stability over the medium term are on the upside in a context of very vigorous money and credit growth and that the current short-term upward pressure on inflation must not spill over to the medium term", said ECB president Jean Claude Trichet during the press conference following the official announcement. The firm anchoring of inflation expectations over the medium and long term is of the highest priority to the Governing Council, which remains committed to preventing second-round effects and the materialization of upside risks to price stability over the medium term added the ECB president. Further on Trichet said that the reappraisal of risk in financial markets continues and "there remains unusually high uncertainty about its overall impact on the real economy" adding that the ECB "will continue to monitor very closely all developments over the coming weeks". Regarding economic activity in the Euro area the latest information at the turn of the year points to "a more moderate pace of growth than the quarter-on-quarter rate of 0.8% observed in the third quarter of 2007". The Euro area economy does not have major imbalances: profitability has been sustained and unemployment rates have fallen to levels not seen for 25 years. As a result of the improved economic conditions and wage moderation, the number of people employed and labour force participation have increased significantly. "Consumption growth should therefore continue to contribute to economic expansion, in line with real disposable income, and investment growth should provide ongoing support". However, "uncertainty about the prospects for economic growth is unusually high and the risks surrounding the outlook for economic activity have been confirmed to lie on the downside. Risks relate mainly to a potentially broader than currently expected impact of financial market developments on financing conditions and economic sentiment, with negative effects on world and Euro area growth". Other downside risks stem from the scope for additional oil and other commodity price rises, concerns about protectionist pressures and the possibility of disorderly developments due to global imbalances, said Trichet. With regard to price developments, according to Eurostat's flash estimate the annual HICP inflation rate was 3.2% in January 2008, compared with 3.1% in December 2007. This confirms the continued strong upward pressure on inflation in the short term, stemming mainly from strong increases in commodity prices, in particular oil and food prices, in recent months. "Looking ahead, the annual HICP inflation rate will most likely remain significantly above 2% in the coming months and moderate only gradually in the further course of 2008. This confirms our expectation of a protracted period of temporarily high rates of inflation" underlined Trichet. The ECB Governing Council also decided on Thursday to renew the two supplementary longer-term refinancing operations (LTROs) that were allotted on 23 November 2007 (EUR 60 billion) and on 12 December 2007 (EUR 60 billion) and which will mature on 21 February 2008 and on 13 March 2008, respectively. "The renewal of these two supplementary LTROs is aimed at further consolidating the progress achieved so far in the normalisation of the Euro money market".