ECB holds rates

The European Central Bank said it left interest rates unchanged at 4 percent on Thursday to help the fight against inflation, though it unveiled higher consumer price forecasts for this year and next.
ECB staff also cut forecasts for eurozone growth but the bank's firm focus on price risks prompted analysts to push back expectations for a speedy cut to interest rates and sent the euro to a new record high against the US dollar.
ECB President Jean-Claude Trichet promised the central bank would do everything necessary to keep inflation in check, although he also said economic uncertainty was unusually high.
"We had absolutely no call for either decreasing rates or increasing rates, we were unanimous," Trichet told a news conference after holding rates for the ninth month in a row. "We believe that the current monetary policy steps will ... achieve our objective of medium term price stability and solid anchoring of inflation expectations."
Analysts said Trichet's comments raised the odds of an extended pause at the current level as the ECB faces competing pressures from slowing growth and record high inflation.
"Mr Trichet does not sound like a central banker who may be about to cut interest rates," CIBC World Markets economist Audrey Childe-Freeman said. "The policy of wait and see is here to stay for a while longer." Before the rate decision investors had bet on rates sinking to 3.25 percent by year-end, but Trichet distanced himself from these expectations.
"We're not underwriting the present future market interest rates," he said, when asked if expectations were misplaced. Anchoring inflation expectations in the medium to longer term was the ECB's top priority, he said, denying that the ECB was favouring the interests of banks struggling with market turmoil over those of pensioners and ordinary citizens.
"We will do what is necessary to deliver price stability in the medium term. Full stop. And you can deduce whatever conclusion you judge appropriate from that," he said.
But at the same time, Trichet unveiled staff inflation forecasts sharply higher than the last round of projections in December, which suggest the ECB could miss its goal of inflation below 2 percent for 10 years running. Staff now see inflation around 2.9 percent this year and 2.1 percent in 2009, compared to the last forecasts in December of around 2.5 percent this year and 1.8 percent in 2009. Since then, inflation hast shot up to a record 3.2 percent and Trichet said it was likely to stay elevated for some time.
The forecasts were higher than many economists had expected and will make it harder to justify rate cuts, although unions again urged the ECB to follow other major central banks and loosen policy to ease pressure on the euro.
"The euro's continuing appreciation is becoming alarming," the European Trade Union Confederation said in comments echoed by employer groups. The International Monetary Fund also said the euro was "on the strong side" although IMF deputy John Lipsky said ECB rates were appropriate. On the record strength of the euro, which crimps growth while also dampening inflation, Trichet said he noted with "extreme attention" the United States' support for a strong dollar.