MercoPress. South Atlantic News Agency

Targeting short-term inflation ECB leaves Euro rates on hold

The European Central Bank left interest rates on hold at 4% highlighting concern about accelerating short-term inflation pressures and the acknowledgement of a protracted period of economic uncertainty stemming from the global credit crisis.

With March consumer inflation at 3.5%, well above the ECB medium-term goal of keeping inflation below 2%, the Thursday decision was widely expected. In his regular press conference following the meeting of the ECB Governing Council president Jean Claude Trichet said that the "level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions may last longer than initially expected". However "against this background, we emphasize that maintaining price stability in the medium term is our primary objective in accordance with our mandate". But he also emphasized that the economic fundamentals of the Euro area "are sound" and macroeconomic data continue to point to moderate but ongoing real GDP growth, 0.4% in the last quarter of 2007. "The firm anchoring of medium to longer-term inflation expectations is of the highest priority to the ECB" he said adding that the bank "remains strongly committed to preventing second-round effects and the materialization of upside risks to price stability over the medium term". Looking ahead Trichet said that both domestic and foreign demand is expected to support ongoing real GDP growth in the Euro area, albeit to a lesser extent than during 2007. Strong growth in emerging economies should continue to support Euro area external demand coupled with investment growth in the area should provide "ongoing support to economic activity, as capacity utilization is high, profitability has been sustained and there are no significant signs of supply constraints on bank loans" At the same time, as a result of the improved economic conditions and wage moderation, employment and labour force participation have increased significantly and "unemployment rates have fallen to levels not seen for 25 years". Trichet stated that while being dampened by the impact of higher energy and food prices on purchasing power, consumption growth should continue to contribute to economic expansion, in line with real disposable income growth. But he also admitted the uncertainty surrounding the outlook for economic growth remains high, and downside risks prevail, since "the risks relate mainly to the financial market turbulence, which could last longer than initially thought and could have a broader than currently expected impact on the real economy". Downside risks also stem from the dampening impact on consumption and investment of further "unanticipated increases in energy and food prices, as well as from protectionist pressures and the possibility of disorderly developments owing to global imbalances". Following the ECB announcement the Euro was fetching 1.5742 dollars late Thursday compared to 1.5832 late Wednesday. Earlier in the day the Euro jumped to a record 1.5913 dollars. The US dollar also lost ground against the Japanese Yen, trading at 101.88 Yen, down from 102.43 on Wednesday.