ECB Holds Rate, Trichet Warns on Inflation, Growth

The European Central Bank kept its main rate on hold at 4 percent as expected on Thursday, despite mounting pressure for an easing in monetary policy to help avert a global recession.

Inflation is still the bank's main concern, but recent data showed that there are risks for economic growth, ECB President Jean-Claude Trichet said in a news conference.

"The current short-term pressure on inflation must not spill over medium term," Trichet said. "The governing council remains committed to preventing second-round effects."

"Uncertainties about the prospects of economic activity are unusually high," he added.

"We were unanimous to decide in maintaining rates at 4 percent and there was no call for increasing or decreasing rates," Trichet said.

He did not want to offer clues on future monetary policy decisions, stressing that fighting inflation was paramount.

"As I just said, we are constantly alert and we never pre-commit. So I will only say that in the months to come, which will characterized by an unusually high level of certainty, we will continue to do what is necessary to maintain price stability," Trichet said.

Analysts are looking into the ECB president's statements for signs of a more dovish stance that would offer some support to stocks.

"A lot has changed over the past four weeks. I think this time around we'll get more of a dovish statement but I don't think inflation concerns are going to disappear," Sarah Hewin, senior economist at American Express, told "Power Lunch Europe."

Euro Weakness

The Euro Zone Services Purchasing Managers Index fell a sharp 1.4 points to 50.6 in January, to a four-and-a-half year low, signaling a slowdown in the 15-member single currency area.

But euro-zone inflation also hit a record 14-year high of 3.2 percent in January, driven by oil and food prices, well above the ECB's comfort level of below 2 percent.

The bank had considered raising the rate in January to fend off inflationary pressures, and analysts say Trichet is unlikely to switch to a dovish stance as long as there are negotiations for wages with major European trade unions.

The euro extended losses against the dollar after Trichet said risks for economic activity were on the downside, while major European stock indexes fell further into the red.

"Trichet is basically giving us the green light to sell some more as he talks about downside risks to growth," Steven Butler, director FX trading at Scotia Capital in Toronto told Reuters.

No Fiscal Stimulus

Cutting taxes to boost growth should be avoided, Trichet said, urging European countries with a loose fiscal policy to make further efforts to trim their budget deficits.

David McCormick, the Treasury's undersecretary for international affairs, said earlier this week called on other countries to "take prudent steps to strengthen their economies' demand components."

But Trichet disagreed that this was the way to avoid a global slowdown.

"There is ample evidence that activist fiscal policies were not effective in stabilizing European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP," he said.

© 2009 CNBC.com