The European Central Bank (ECB) left borrowing costs on hold Thursday but with ECB chief Jean-Claude Trichet warning strongly that the bank was prepared to act on interest rates to stamp out the threat posed to inflation by big wage rises, according to dpa. Holding its first meeting for 2008, the ECB's 21-head rate-setting council left monetary policy in the 15-member eurozone unchanged at 4 per cent, which was in line with analysts' forecasts. But with unions and employers across Europe gearing up for a round of wage talks and many labour leaders pushing for hefty pay rises after a protracted period of stagnating wages, Trichet told a press conference the bank was "not neutral" on interest rates. He said the ECB's governing council was ready to "act pre- emptively" to head off the threat to inflation caused by spiralling consumer prices and wages. Thursday's ECB meeting coincided with German public sector unions launching talks on a claim for a hefty 8-per-cent pay rise this year. The ECB chief's strong message to those negotiating the latest pay round in the eurozone came despite his admitting that data and indicators for the currency bloc had been mixed. "We are in a position of total alertness," he said. "We will not accept second round effects (wage-led inflation rises)," adding that credit growth had been "vigorous." But despite Trichet's tough talking, analysts believe that signs of a slackening global economy and moves by other major central banks to cut the cost of money could result in the ECB holding fire on rates, possibly until the end of 2008. Some economists, however, believe that the ECB will ultimately be forced to follow central banks such as the US Federal Reserve and the Bank of England and trim rates during the course of the year. Indeed, while the Bank of England announced Thursday it was leaving borrowing costs on hold at 5.5 per cent, analysts expect slumping consumer demand and a weakening housing market to result in the London-based central bank pressing on with rate cuts next month. A February rate cut by the Bank of England would follow the 25- basis-point reduction the British monetary authorities delivered last month. In the meantime, the Frankfurt-based ECB has been forced to walk a fine line between slowing growth and renewed inflationary pressures, with Trichet saying that the governing council had considered "the pros and cons" of both increasing rates and not raising rates. "We believe that wage growth will only be moderate," said Niels- Henrik Bjorn, economist with Danske Bank. "In the second half of 2008 we predict slow growth and increasing pressure on the ECB to cut rates." Thursday's central bank meetings in London and Frankfurt were also held against the backdrop of ongoing uncertainty in money markets, with the ECB also announcing Thursday that it had joined the Federal Reserve to inject another 10 billion dollars into financial markets to ensure there was no seizing-up of credit. Likewise, the Swiss National Bank also announced plans on Thursday to offer 4 billion dollars in additional liquidity. The ECB and other leading central banks have already pumped about 100 billion dollars of financial support into money markets as part of efforts to help boost confidence in the face of the global economic uncertainty caused by the US housing market crisis. Economists see the eurozone's expansion rate falling to below 2 per cent in 2008 after chalking up a growth rate of about 2.5 per cent last year. The economic sentiment in the eurozone is near a two- year low, a survey reported this week. At the same time, however, inflationary pressures have been on the rise, with Trichet indicating that inflation is likely to remain stuck well above the ECB's 2-per-cent target on the back of high food prices and a surge in energy costs. Inflation in the currency bloc came in at 3.1 per cent in December, data released last week. Thursday's ECB meeting also marked another historic step in the expansion of the bank's governing council, this time to 21 to include the central banks of Malta and Cyprus following their admission this month to the eurozone. The adoption of the euro by Malta and Cyprus on January 1 brought the eurozone's membership to 15.
