The European Central Bank has kept eurozone interest rates unchanged for the 12th month in a row. The ECB has also revised its inflation forecasts upwards, and economic growth predictions downwards.
And that is the central bank’s dilemma. Cutting rates to boost GDP for instance, could drive up already rising inflation – and vice versa.
The ECB President Jean-Claude Trichet said: “The uncertainty surrounding this outlook for economic growth remains high and downside risks prevail. In particular, risks continue to relate to the potential for financial market turbulence, to have a more negative impact on the real economy than anticipated. Inflation rates have risen significantly since the autumn of last year, owing mainly to strong increases in energy and food prices.”
The ECB’s 4 per cent benchmark rate is a six-and-a-half year high. The Federal Reserve in the United States has been slashing rates in recent months to try to stave off recession and calm tumbling markets.
The Bank of England’s rate of 5 per cent has also been left untouched. The UK is also facing the prospect of a sharply slowing economy, consumer confidence at its lowest since the early 1990’s and falling house-prices. According to the Organisation for Economic Cooperation and Development, Britain’s economy is the most vulnerable to a property slump.