Another monthly meeting of the European Central Bank has passed with no change to the key interest rate.It remains at 2%, where it has been since June 2003, but the market is becoming more convinced the euro zone central bank could put up the cost of borrowing as soon as December. It is five years since the ECB raised the rate. It has been keeping it low to encourage economic growth.
By contrast the US economy has expanded robustly enough for the Federal Reserve to raise it 12 times.
ECB President Jean Claude Trichet responded to questions on the bank’s recent more hawkish tone by saying: “I have already said several times that we were not promising anybody that we would not move. We think that present interest rates are still appropriate, that strong vigilance is of the essence in the present situation and that inflationary
risks are on the upside.”
The Federal Reserve has more leeway to crack down on inflation by raising rates, because the US economy will grow this year by 3.5%, according to a recent International Monetary Fund forecast. In the euro zone, GDP will expand by just 1.2%, the IMF said. The fact that Trichet quashed expectations of an interest rate increase in the near-term caused the euro to weaken against the dollar.
An ECB rate rise, when it does come, will boost the euro, which could damage export competitiveness and hurt Europe’s fragile economic recovery.