The European Central Bank (ECB) is keeping open its options on a possible September interest rate increase and will not decide finally until next week, ECB president Jean-Claude Trichet made clear yesterday.
In his first public appearance since the recent financial market turmoil, Mr Trichet deliberately created extra room for manoeuvre for the Frankfurt-based institution as it continues to assess the implications for the eurozone economy.
The ECB was never "pre-committed" to any particular action, he said, and had always pledged to heed market developments.
In response, financial markets priced in an even lower chance of the ECB going ahead with a rise in borrowing costs on September 6th.
Holding back on a rate hike would provide respite for mortgage-holders, who have dealt with eight rate increases since the end of 2005.
Mr Trichet's comments reflected the ECB's belief that the scale of recent events justifies it abandoning, at least temporarily, the usual commitment to predictability, which the central bank argues increases the overall effectiveness of its monetary policy.
Since Mr Trichet became ECB president in November 2003, the outcome of governing council meetings has always been a foregone conclusion.
At the start of August, another quarter percentage point rise to 4.25 per cent in the ECB's main interest rate next week had appeared a certainty. Mr Trichet pledged "strong vigilance" in the battle against inflation - code words used to signal a rise was one month away.
But speaking at a conference in Budapest yesterday, Mr Trichet said: "At that time [ August 2nd], after having mentioned our strong vigilance, I also said we were never pre-committed - as this has always been our constant position".
That strongly suggested that in the run-up to next week the ECB would act like the Bank of England - with no clear signals before the actual interest rate announcement.
Analysts detected a further softening in Mr Trichet's comments yesterday that his August 2nd statements had been "before the market turbulences that we had to cope with in the world".
The ECB's governing council had not discussed monetary policy since that date, he confirmed.
"The next assessment of the governing council will be made on September 6th. We will have to assess all elements of the situation with more information to come in all fields."
From August 9th, the ECB launched a series of liquidity-boosting operations to smooth conditions in money markets - including last week in the three-month funds market.
Yesterday it announced that fresh sums would be injected via its regular weekly operations, although the amount would be consistent "with the ongoing normalisation of conditions". The ECB's eventual decision on its main interest rate will depend heavily on whether calm returns to financial markets and its assessment of the outlook for the eurozone economy. Its initial reaction earlier this month was that the fall-out from financial market turmoil would be limited, but the tone of Mr Trichet's comments suggested that assessment was changing. Recent economic indicators have pointed to some weakening in euro-zone growth - although not as a result of recent financial market turmoil - and sentiment indicators, including today's German Ifo business confidence survey, will be watched carefully. But the ECB prefers to focus on underlying trends.
