Europe Economy

ECB Holds Interest Rates at 4%

The European Central Bank kept rates on hold at 4 percent, as expected, on Thursday, sticking to its mandate to fight inflation at any cost.

While other central banks around the world can lower rates to promote economic growth, the ECB's mandate requires it to focus solely on price stability.

At a press conference, ECB President Jean-Claude Trichet said risks remain that inflation will rise further, as food and oil prices are likely to increase.

He also said second-round effects, where companies could pass price rises on to consumers, may appear.

"We are experiencing a rather protracted period of temporarily high inflation rates," Trichet told a news conference after the decision.

"The level of uncertainty resulting from the turmoil in financial markets remains unusually high," he added.

Economists had expected the bank to signal rate cuts as early as in April, but, as inflation hit a record-high of 3.5 percent in March, think the possibility of monetary easing is more likely in the second half of the year -- maybe as late as the fourth quarter.

Germany's closely-watched Ifo and ZEW sentiment indicators continued to show brimming confidence in March, while European Central Bank Governing Council member Axel Weber said no later than last Saturday that in Germany, first-quarter real gross domestic product growth has been "strong".

Trichet warned previously that recent wage deals for Germany's unions should not be taken as a benchmark by other countries, as the much-feared second-round effects of inflation could push inflation even further.

Noting that unemployment in the euro-zone was at its lowest level in 25 years, he said political pressures to cut taxes were likely to increase, but called on "prudent and stability-oriented" fiscal policies, to contain inflation pressures.

"With the economic slowdown considered to be only gradual, the ECB will most likely keep the emphasis on asserting its inflation-fighting credentials," ING Bank's Peter Vanden Houte said in a market note.

Before the decision, the euro hit another record high above the greenback at $1.59. It later surrounded some of its gains, as some traders seemed to take the lack of a more hawkish stance than usual as a signal the ECB was starting to worry about economic growth.

"I never comment on markets evolution ... that would be strange," Trichet said. But, he added: "the sentiment of the Governing Council is the same as last time. If there is any interpretation that we changed our view, it would be wrong."

"We were unanimous in taking that decision," he said.