ECB's rates stay flat till July

Shanghai Daily, May 6, 2011

The European Central Bank left its key interest rate unchanged and its president suggested it would hold off at least until July before raising borrowing costs again to quell inflation.

Its president Jean-Claude Trichet yesterday said the bank would "monitor very closely" the risk of higher inflation. Economists who follow the ECB say that wording means no rate increase at June's meeting.

Investors had been expecting Trichet to say the ECB was practicing "strong vigilance" over inflation, which in the past has been a key phrase to suggest a rate increase the following month. Those predictions had helped buoy the euro toward 18-month dollar highs as higher rates can boost a currency by attracting investors.

"The euro was hammered after Trichet failed to signal a rate hike next month," said Benjamin Reitzes, a foreign exchange strategist at BMO Capital Markets.

Despite the pause in rate hikes, Trichet has made it clear that borrowings are going higher as the bulk of Europe's economy sees more growth and inflation despite the debt crisis in Greece, Ireland and Portugal.

The bank raised its key rate a quarter point to 1.25 percent last month, and has indicated that further increases are likely this year especially as economies like Germany's speed ahead and consumer prices are rising at 2.8 percent a year - above the ECB's target rate of just below 2 percent.

A slower pace, as indicated yesterday, suggests the bank continues to have concerns about Europe's recovery. It said risks to growth "remain broadly balanced in an atmosphere of considerable uncertainty."

At the moment, economists expect the main rate to reach 2 percent by the end of this year, rising in quarter-point stages.

Though the bank's actions are aimed at putting a lid on inflation, a series of rate increases will put more pressure on hard-pressed businesses and consumers in the three bailed-out countries, which desperately need growth to pay down debts. Their debt loads are so big, many economists expect one or more to fail to pay everything they owe, probably through a restructuring. Yet Trichet made it clear the bank was not holding off to give them a break.