ECB keeps rates steady

The European Central Bank signalled that interest rates will rise again in June in a pre-emptive strike against inflation, but gave few other clues on Thursday about its plans for the rest of the year. Economists had widely expected the ECB to eschew raising rates from their current 3.75 percent this month in favour of a quarter point increase in June.
ECB President Jean-Claude Trichet stuck to familiar language. "Strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialise," he told a news conference in Dublin, where the ECB earlier held one of its twice-yearly meetings away from its Frankfurt home.
References to "strong vigilance" are the ECB's standard way of signalling that an interest rate increase is very likely the following month, and Trichet's remarks chimed with the message he delivered a month ago.
In the ECB's monthly policy statement, he said key interest rates were moderate and that monetary policy continued to be on the accommodative side, echoing April's language. "Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted," he told reporters.
Beyond seeking confirmation of a June rate rise, economists had wanted to know whether this would take rates into territory which no longer provides unnecessary economic stimulus, and mark the peak of a tightening cycle which started in December 2005.
But Trichet declined to answer directly a question on the market's expectations of interest rate rises after June, noting that the ECB never pre-committed itself to future policy moves, and based its decisions on the latest economic data. Asked if the ECB would pause in raising rates after June, Trichet said the Governing Council would decide at the time, and would do whatever was necessary to ensure stable prices.
"Post-June, the ECB is keeping its hand very close to its chest, and much is likely to depend on the strength of the euro, as well as growth and inflation developments," said Howard Archer, chief European economist at consultancy Global Insight.
Inflation has been below 2 percent and in line with the ECB's price stability goal for the past eight months, and has also been further held in check by a strong euro. Trichet, pressed repeatedly about the dollar's weakness against the euro - which makes life harder for European exporters and tightens euro-zone monetary conditions - stressed that the United States had said a strong dollar was in its national interest.
"I will stick (with my earlier comments). I have noted with great interest that the Treasury Secretary of the United States and the American authorities have said that the strong dollar was in the interests of the US," he said.