MercoPress. South Atlantic News Agency

Euro interest rates unchanged;increase “possible” next time

The European Central Bank (ECB) left interest rates for the Euro zone unchanged at 4% but admitted an increase was “possible” at its next meeting because risks to price stability over the medium term have further increased.

ECB President Jean-Claude Trichet admitted iinflation rates had risen significantly since the autumn of last year, "owing mainly to strong increases in energy and food prices. HICP inflation is now expected to remain high for a more protracted period than previously thought". Inflation in the Euro zone was 3.6% in May, above the target of about 2%. The interest rate has been kept steady since July 2007, helping the Euro to record highs against the US dollar and the British pound. President Jean-Claude Trichet acknowledged that the ECB Governing Council was in a "state of heightened alertness" about economic conditions but would take into account all prevailing factors before it made a decision. "We considered - it is not excluded - that after having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation," said Trichet. "I don't say it's certain. I say it's possible." But he emphasised that a decision would be taken with reference to the specific inflation risk at the time of the next meeting. Mr Trichet revealed that there had been some among the Governing Council who wanted to increase rates, but the decision was eventually reached by consensus. This week the Organisation for Economic Co-operation and Development (OECD) revised its Euro zone inflation forecast for 2008 up to an average rate of 3.4% - which would be the highest level since 1993. The growth in prices has made the ECB reluctant to cut rates like its counterparts in the US and the UK, which analysts say have been more severely affected by the global credit problems. The US Federal Reserve has aggressively cut its key interest rate from 5.25% to 2% since last September and the Bank of England has also been trimming UK rates which now stand at 5%. The different approaches have sent the Euro to record highs against the dollar and sterling since the beginning of the year which has made Euro zone exports more expensive and sparked criticism from some leading exporters, such as Airbus. But Mr. Trichet argued that the fundamentals of the Euro zone economy remain sound, and does not suffer from major imbalances. "Against this background, we expect investment growth in the Euro area to provide ongoing support to economic activity, as capacity utilization remains solid and profitability in the non-financial corporate sector has been sustained". He added that employment and labour force participation have increased significantly, and unemployment rates have fallen to levels not seen for 25 years. "These developments support disposable income, although purchasing power is being dampened by the impact of higher energy and food prices".