European Central Bank Keeps Rates Steady at 3.75%


The European Central Bank kept short-term interest rates on hold Thursday as expected, but economists and investors think that another rate rise is due this summer.

ECB President Jean-Claude Trichet’s statement was much the same as that in March. Trichet reiterated that the “governing council will continue to monitor all developments very closely,” when speaking at a press conference following the decision.

Economists said similar language to the previous statement would indicate that the central bank can continue to keep rates steady at the May meeting.

"By resorting to the 'monitor very closely' reference, Trichet clarified that the next rate hike is going to be delivered in June rather than May," Aurelio Maccario, an economist at Unicredi MIB, told Reuters. "The inflation outlook for this year is pretty much in line with ours. Prices growth is expected to decelerate until next summer and rise toward 2% by the year-end."

Economists overwhelmingly predicted the central bank would hold rates at 3.75%, with a quarter of those surveyed by Reuters expecting the next quarter-point rate rise to come in June rather than May.

The euro remained at two-year highs versus the dollar and at fresh all-time peaks against the yen, following the announcement. Europe's major stock indexes continued to trade slightly lower as did the bund market.

Economic data over the past month has thrown up nothing to shift the ECB's view that the euro zone economy will grow solidly and that a danger of higher inflation persists.

Euro zone inflation is currently at 1.9%, in line with the ECB's target for price stability, though the central bank forecasts it will rise later this year as the effect of last year's oil price falls fades away.

Solid Growth in the Europe

Interest rates can probably stay around 3.75% for the near term because “(we) currently have non-inflationary, solid growth in the euro area … we have a kind of price stability,” Paul Günter Schmidt, professor for economics at HfB Business School of Finance & Management said on “Power Lunch Europe.”

The central bank has won welcome support for its inflationary vigilance from the International Monetary Fund, once a skeptic over ECB rate tightening.

"With the area's growth projected to remain close to or above potential and the possibility of some further upward pressure on factor utilization and prices, a further interest rate increase to 4% by this summer would seem warranted," the IMF said in its World Economic Outlook released on Wednesday.

Global markets enjoyed a rally last month after the U.S. Federal Reserve changed the wording in its statement, which many took as a sign that the Fed could start lowering the Fed funds rate. But later statement by Fed Chairman Ben Bernanke, and minutes of the March meeting released Wednesday, indicated that the Fed was still very concerned about inflation, denting hopes of a rate cut.