The European Central Bank has left its base interest rate at a record low of 2%. A lack of concern about inflation played into that decision according to bank President Jean-Claude Trichet.He said: “In the coming months, annual inflation rates are likely to fluctuate around 2%. Looking further ahead, there is no evidence that stronger underlying domestic inflationary pressures are building up in the euro zone. Over recent quarters wage increases have remained moderate. In the context of moderate economic growth, this trend should continue.”
That moderate economic growth expectation is based on the widely held feeling among economists that the strong euro will mean lower exports.In addition rising unemployment and oil prices will have an impact on investment and spending. Trichet confirmed that the European Central Bank has lowered its growth forecast for the euro zone to about 1.6% from 1.9% for this year. That is down from a growth rate of 2% last year. With regard to interest rates, the ECB’s job is complicated by the divergence in growth rates in different countries. The economies of Germany and Italy, which account for about half the euro region, contracted in the fourth quarter of last year. But in France and Spain, growth gathered pace and house prices jumped. Investors are betting that the bank will increase the cost of borrowing by the end of the third quarter of this year.