ECB holds rates

The European Central Bank left interest rates unchanged on Thursday, but President Jean-Claude Trichet said policy is certainly not neutral and the ECB is ready to take pre-emptive action against inflation if needed.
The ECB''s Governing Council was totally alert on inflation and discussed raising rates from 4.0 percent on Thursday, while the option of a cut was not part of the debate, he told a news conference.
Asked whether it was correct to say the ECB had a bias to tighten rates, he said: "We are certainly not neutral." Trichet warned unions, firms and governments that the ECB is not prepared to tolerate second round inflation effects - a wage-price spiral triggered by higher food and oil prices.
"We are in a position of total alertness," he said. "The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise."
Analysts said the ECB''s tough message meant the option of a rate rise could not be discounted, although roughly half those polled by Reuters last week expect no change throughout 2008. "Rate cuts are clearly off the agenda for now," CIBC economist Audrey Childe-Freeman said. Inflation in the countries using the euro is at a 6-1/2 year high of 3.1 percent, well above the ECB''s 2 percent price stability ceiling. The ECB has repeatedly warned of second round effects, particularly from workers raising their wage demands to compensate for the high energy and food costs.
Without wage restraint and a fall in commodity prices, the current "hump" in eurozone inflation was unlikely to dissipate as fast as the ECB''s staff forecast in December, Trichet said. Unlike the ECB, other central banks have already started monetary easing campaigns, concerned that financial market turbulence and the slowing US economy could jeopardise growth more than previously estimated.
Trichet said cutting eurozone rates was not discussed at Thursday''s monthly ECB policy meeting. He described the decision as a consensus, as he did last month when some policymakers argued for a rise, but he declined to day whether the level of support for higher rates had increased since then.
Latest data confirmed economic fundamentals are strong in the euro zone, he said. The economy was likely to grow in line with its potential in 2008, although the pace was slowing from that in the third quarter.
Higher oil and food prices had been pushing up inflation, and medium-term price risks pointed to the upside, with a particular onus on employees to accept restrained wage rises. "The Governing Council is monitoring wage negotiations with particular attention. Any indexation scheme of nominal wages to prices should be eliminated," he said.