THE EUROPEAN Central Bank (ECB) kept its key interest rate on hold at 1 per cent yesterday and signalled no changes are likely soon, offering some sense of stability to hard-pressed borrowers.
Jean-Claude Trichet, ECB president, said current interest rates were “appropriate” – a phrase that signals the bank is firmly on hold. After his comments, financial markets were still not pricing in a rise in ECB interest rates until the second half of next year.
Austin Hughes, chief economist at KBC, said the earliest hike in interest rates would come at the end of next summer, even though there is a “clear sense” that the worst of the downturn may have passed.
“Mr Trichet again emphasised today that the recovery is unlikely to develop in a way that would threaten the need for an early tightening of policy,” Mr Hughes said.
Expectations that the euro-zone economy had returned to growth in the third quarter were boosted by a stronger than expected 1.7 per cent rise in German industrial production in August, reported yesterday.
But Mr Trichet foresaw a “bumpy road” ahead for the euro zone and warned that the outlook was surrounded by exceptional uncertainty.
Anyone who believed in a return to businessn as normal was “absolutely plain wrong”, he added. Describing this as one of Mr Trichet’s “favourite metaphors”, Mr Hughes said that the ECB seemed to be of the view that “significant challenges still lie ahead”.
Mr Trichet also warned of an “increasingly pressing” need for “ambitious and realistic fiscal exit and consolidation strategies” to ensure the sustainability of public finances in the 16-country region.
At AIB, economists agreed that it would be “well into next year” before rates would be increased.
“Indeed, if the ECB’s very pessimistic growth forecasts prove anyway accurate, there would not be a basis for hiking rates at all next year,” they judged.
Simon Barry, chief economist at Ulster Bank Capital Markets, said that while a “stronger than expected recovery” could see rates rising before the end of 2010, it was clear “both the euro-area economy and the corresponding ECB-speak . . . have some way to go” before then.
Mr Barry believes the ECB’s economic views “may well prove overly pessimistic”.
He suggested the Monetary Policy Committee’s December meeting could be particularly important in terms of upgrading forecasts.
Separately, the Bank of England yesterday also kept interest rates unchanged, at 0.5 per cent. – (Additional reporting the Financial Times)
