As expected, the European Central Bank has kept interest rates on hold at 4.25%, against a background of weak euro zone economic data and a fresh record high for inflation. ECB President Jean-Claude Trichet and the bank’s Governing Council remain concerned about inflation but for the moment are keeping their options open.
Trichet explained the decision by saying: “This will preserve purchasing power in the medium term and support sustainable growth and employment. On the basis of our assessment, the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.” The phrase “monitor very closely all developments” was seen by economists as an indication of no rate increase this year.
At the same time, the Bank of England also held the cost of borrowing in the UK unchanged at 5%. Its last move was in April with a quarter percentage point cut. The policymakers at Britain’s central bank have the same problem as the ECB, that is balancing slowing growth and rising inflation and so they are also expected to keep rates on hold this year.