ECB Stays on Hold, Bucks Global Easing Trend

The European Central Bank kept rates on hold at 4 percent as expected on Thursday, bucking a global trend of monetary easing amid increased turmoil in the financial markets.

ECB President Jean-Claude Trichet maintained the hawkish tone and said some of the governing council's members were in favor of a rate rise, while a rate cut was not discussed.

The ECB also released new projections for growth and inflation.

Annual real GDP growth is projected in the range of 2.4 percent to 2.8 percent in 2007, and between 1.5 percent and 2.5 percent in 2008.

It is forecast between 1.6 percent and 2.6 percent in 2009, Trichet said.

"In the council's view, the risks on the economic growth front remain on the downside," Trichet added.

The inflation projection was revised sharply upwards, reflecting expectations of high prices for oil and food ahead.

The December Eurosystem staff projections foresee annual inflation to be between 2 percent and 2.2 percent in 2007, but then to rise to between 2 percent and 3 percent next year. For 2009, inflation is projected at between 1.2 percent and 2.4 percent, Trichet said.

The effects of the financial market turmoil were not yet fully assessed and the ECB still needs clarity before making future monetary policy decisions, he said.

"The reappraisal of risk in financial markets is still evolving and is accompanied by continued uncertainty about the potential impact on the real economy," Trichet added. "We will therefore monitor very closely all developments by acting in a firm and timely manner."

Inflation Risk

The ECB stands ready to counter future upside pressures on inflation, Trichet said, even though he estimated inflation will see a "protracted hump" next year.

"We will not tolerate second-round effects. It is essential to meeting our mandate. It is also essential to continue anchoring long-term inflation expectations," he said.

The euro rose against the dollar and the yen after Trichet said the bank was decided to continue fighting inflation.

But the bank's tightening cycle has come to an end, analysts said, and it may even give in at some point to pressure to join the rest of the banks in developed countries.

"I think there won't be room for an interest-rate hike, especially in the light of the strong euro," Claudia Broyer, senior economist at Allianz Dresdner Economic Research, told "Power Lunch Europe."

The probability of rate cuts from the Fed and the crisis in the financial market, which has just become more intense, will also make the ECB keep rates on hold, Broyer said.

"The ECB wants to stop any discussion of rate reductions and to keep inflation expectations under control as they've been persistently surprised by accelerating headline inflation," Ken Wattret, chief European market economist at French bank BNP Paribas, told Reuters.

"But my feeling is that the markets will look through the ECB's hawkish rhetoric and conclude the next move is going to be down, rather than up," Wattret said.