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ECB keeps rates on hold as oil hike spurs inflation fears
Published in Saudi Press Agency on 08 - 05 - 2008


The European Central Bank's 21-head rate-
setting council kept interest rates on hold Thursday for the 11th
consecutive month with ECB chief Jean-Claude Trichet warning that
spiralling oil and food prices were threatening to spark a renewed
surge in inflation, according to dpa.
Despite a series of rapid-fire US rate cuts and signs of crimping
economic growth in the 15-member eurozone, the ECB's governing
council left its benchmark refinancing rate unchanged at a six-year
high of 4.0 per cent at its meeting, which was held in Athens. The
decision was in line with analysts' forecasts.
The build-up to Thursday's meeting has been accompanied by oil
prices soaring to a record high just short of 124 dollars a barrel,
with Trichet indicating that the ECB was in no rush to cut borrowing
costs.
Speaking at his regular monthly press conference following the
governing council's meeting, Trichet talked tough about the risks
facing consumer prices in the eurozone saying action to curb
inflation expectations remained the ECB's "highest priority."
The bank, he insisted, was in a state of "permanent alertness,"
adding there was "no time for complacency in any respect."
The ECB chief also warned that in the wake of the US subprime
mortgage crisis, "the level of uncertainty resulting from the turmoil
in financial markets remained unusually high and tensions still
persist."
But Trichet was cautiously optimistic about the outlook for global
growth saying that despite slowing grow the world economy remained
"resilient" as a result of the solid expansion rates in leading
emerging economies.
This in turn was also helping to underpin the eurozone's economic
performance.
Thursday's ECB meeting coincided with an announcement from the
Bank of England that it had also kept its benchmark rates on hold at
5 per cent.
However, unlike the ECB, analysts believe that sinking British
housing prices and a steady stream of downbeat economic news could
open the way for the Bank of England to press on with its rate-
cutting cycle, possibly as early as next month.
At the same time, while the ECB has sat tight on rates throughout
the financial turmoil unleashed by the US subprime crisis, the US
Federal Reserve has trimmed borrowing costs seven months in a row
cutting the cost of money in the world's biggest economy to 2.0 per
cent last week.
But although data released last week showed eurozone inflation
slipping from 3.6 per cent in March to 3.3 per cent in April,
inflation in the currency bloc remains well above the ECB's annual 2-
per-cent inflation target.
That said, however, both the ECB and economists are expecting
inflation to slow as the year unfolds, which ultimately could help to
pave the way for the bank to reduce the cost of money later in the
year.
"Looking ahead, the annual inflation rate it likely to remain
significantly above 2 per cent in the coming months, moderating only
gradually over the course of 2008," said Trichet.
This has lead some analysts to say that the ECB might soon have
room to move on monetary policy and could trim borrowing costs later
in the year.
In the meantime, the risks of another round of consumer price
pressures combined with a high euro have allowed the ECB to buy time
on interest rates as it sizes up the economic fallout for the
eurozone from rising inflation and slowing growth.


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