ECB holds rates

The European Central Bank left interest rates at 4.25 percent on Thursday, and President Jean-Claude Trichet said it wouldn't get eurozone inflation back on target until 2010. The ECB also published forecasts by its staff showing higher inflation than previously expected, and lower economic growth for this year and next.
However, Trichet said the ECB's outlook for monetary policy and the economy had not changed significantly since last month. "We will deliver price stability during the course of 2010 - I don't want to be more precise," he told his monthly news conference.
Euro zone inflation eased only slightly in August to 3.8 percent from the record 4.0 percent reached in June and July, and remains around double the ECB's medium-term price stability target of just below 2 percent.
Trichet said the 21-member Governing Council had been unanimous in its decision to keep rates on hold, and that it had "no bias" on future rate moves, echoing last month's language. "We do not have any bias - we just increased interest rates (in July), and we increased interest rates precisely to be sure that we are taking into account the risks that we see," he said. Nonetheless, Trichet did not see broad-based second-round inflation effects in the euro zone nor did he see the risk of a recession in the ECB's staff economic forecasts, which are not formally endorsed by the Governing Council.
The ECB is particularly nervous about over-generous wage deals as European trade unions seek pay increases which are well above inflation for workers to compensate for recent jumps in living costs.
New ECB staff projections put eurozone inflation for 2009 in a 2.3-2.9 percent range, increasing the midpoint to 2.6 percent. For this year, it gave a 3.4-3.6 percent range, giving a 3.5 percent midpoint. Growth in the eurozone was seen at 1.1-1.7 percent, for a midpoint of 1.4 percent, in 2008 and 0.6-1.8 percent in 2009, for a 1.2 percent midpoint. Three months ago, the ECB staff projected a 3.4 percent midpoint for inflation in 2008 and 2.4 percent for 2009. All 83 economists polled by Reuters before Thursday's meeting of the Governing Council had expected rates to stay on hold in the absence of any clear signal from the ECB that it was considering a change.