Euro-zone interest rates are expected to stay at current levels for some months, despite a decision by the Bank of England to increase UK rates yesterday.
The decision to raise UK base interest rates by 0.25 of a percentage point to 3.75 per cent was the first move upwards by a major central bank since 2000. But the new president of the European Central Bank (ECB), Mr Jean-Claude Trichet, gave no indication at his first press conference yesterday that an early rise in euro rates was anticipated.
The UK rise was sparked by reviving growth and increasing house prices, although an accompanying Bank of England statement tried to allay concerns of a rapid series of rises. Inflation was rising "gradually", it said. Many analysts do not expect the next quarter point rise to come until February, but some anticipate it could come as early as December.
In Frankfurt, the ECB governing council kept rates on hold and Mr Trichet promised to maintain the institution's tough, anti-inflation policy in setting interest rates. After chairing his first council meeting, he praised his predecessor, Mr Wim Duisenberg, and said he would follow the same path. "I will have exactly the same strong tradition as my predecessor," he said.
The meeting left interest rates unchanged at 2 per cent and Mr Trichet hinted that no change was likely in the next few months. He expressed confidence that inflation would fall below 2 per cent next year, despite what he described as "stickiness" that will keep it close to its present level of 2.1 per cent in the short term.
"Three factors can be identified as contributing to this stickiness of inflation rates. First, in the remainder of 2003 and early 2004, unprocessed food prices could imply some limited upward pressure as a consequence of this summer's heatwave. Second, oil prices remain higher than expected, owing to political uncertainties in the Middle East. Last but not least, in the course of 2004, planned increases in indirect taxes and administered prices in some euro area countries will have an upward impact on inflation," he said.
Mr Trichet, in what analysts saw as an assured first public performance, said that, although inflation would not fall as quickly as anticipated and required close monitoring, he was confident it would come into line with the ECB's target in the medium term. He was upbeat about prospects for economic growth both in the euro zone and elsewhere.
"Externally, the expansion of global economic trade and real GDP growth should counteract the changes in the effective exchange rate of the euro, which is back to its level of early 1999. Domestically, the conditions for investment should improve further, given the continued adjustment efforts of firms to enhance productivity and profitability, the low level of interest rates and generally favourable financing conditions. Moreover, private consumption should benefit from real disposable income growth, fostered by positive terms-of-trade effects stemming from the past appreciation of the euro," he said.
Warning that the Stability and Growth Pact faced "a critical point", he urged EU finance ministers and the Commission to "live up to their responsibilities" in dealing with France's continued breach of the 3 per cent budget deficit limit.
In a carefully worded statement, he appeared to put the authority of the ECB's governing council behind the Commission's demand that tough action be taken against France when finance ministers meet later this month.
