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ECB Holds Interest Rate at 4 Percent

CNBC.com
Thursday, 8 May 2008 | 9:30 AM ET

The European Central Bank left its key interest rate unchanged at 4 percent on Thursday, as widely expected, and its president Jean-Claude Trichet warned that requests to raise wages may put additional pressures on inflation.

"There is a risk that price and wage setting behavior could add to inflation pressures," Trichet told a news conference in Athens. "Higher than expected wage growth may emerge."

European Central Bank President Jean-Claude Trichet
AP
European Central Bank President Jean-Claude Trichet

"It is imperative that all the parties concerned in both the public and the private sector meet their responsibilities," he added.

Trichet underlined that the ECB's main mandate was to curb inflation.

"We emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate. The firm anchoring of medium to longer term inflation objectives is of the highest priority," he said.

But with signs of weakness across the board, most analysts predict that rates will be below 4 percent by the end of the year. The big question is when will the ECB start to change its rhetoric from hawkish to dovish?

Some analysts argue that the latest data – a fall in German exports and industrial production, weak services numbers out of Spain and Italy and falling business sentiment – should stir the bank into action.

"The smell of coffee is rife around the central European zone," Andy Hartwill, market strategist from Objective Capital, said on "Power Lunch Europe."

Trichet said the euro zone had solid economic fundamentals and the latest data confirmed the bank's expectations that economic growth will continue in the first half of the year, albeit at a moderate pace.

"We believe that the current monetary policy stance will contribute to achieving our objective but we will continue to monitor very closely all developments over the coming weeks," he added.

However, Trichet repeated concerns about how troubles afflicting markets might affect economic growth.

"The level of uncertainty resulting from the turmoil in financial markets remain unusually high and tensions still persist," he said.

The euro recovered some ground against the dollar as Trichet's remarks were not considered too dovish.

-- Reuters contributed to this report

Contact Europe: Economy

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