ECB Holds, UK Cuts 0.25%

123jump.com Staff
07 Feb, 2008
New York City

The ECB President Jean Claude Trichet cited rising inflation in the region and global market weakness and left the rates unchanged at 4%. The Bank of England lowered its rate by 0.25% to 5.25% on the weakening UK economy, declining housing market, and falling retail sales. Trichet in the accompanying statement said that corporate borrowing remains robust and there appears to be no credit impairment to coroporate borrowers from the current ongoing financial market turmoil.

[R]12:30 New York, 6:30 PM Frankfurt - European Rate Decisions[/R]

The European Central Bank left its rate unchanged at 4% after an unanimous decision by governing council of 21 members. The President Jean Claude Trichet signaled that he will consider lowering rates if the economy show any sign of weakness. Euro fell after the rate decision. Before the meeting the ECB had signaled that it is worried that wage rise may fuel the inflation and market had interpreted it as a possible rise in interest rates.

The president in the press conference said that the spillover from the current instability in the financial market into the real economy is not known but the short term inflationary pressure must be contained from spilling over into the medium term economic outlook. The price stability remains the focus of the governing council, reiterated Trichet.

He said that, “as the risk re-appraisal in the financial market” is going on its impact on the overall economy remains “highly uncertain”. He went on to add that Euro-are does not have major economic imbalances, corporate profitability is sustained, and employment remains at three-decade high. Labor force participation remains high and as a result consumption should sustain economic growth. He said that fundamentals of the Euro-economy are “sound.”

He also said that the global imbalances, rising oil and commodities prices, potential broader than currently experienced financial market developments, and other disorderly developments are likely to contribute to the downside risks to the economy. He urged corporations to resist from raising product prices and wages and said that this could be “avoided.”

He commented and urged to avoid the linking of wages to consumer price index rises, a direct hint to the labor leaders from asking for higher wages.

He said that annual M3 monetary growth, though moderated in December remains “vigorous”, increased 11% in 2007 and M1 money supply has moderated reflecting dampening effect of higher interest rates. He said that the underlying monetary expansion continues to be strong on the domestic loan expansion to private sector which grew at annual 11.1% in December.

Bank borrowing in Euro area from non-financial corporation remains “robust” and in December 2007 was 40.50% higher than a year ago. Financial turmoil so far has not “impaired” credit availability and credit worthiness to the corporations.

He pointed out that during 2001 and 2003 period higher market volatility led to the portfolio shifts into the monetary assets, but that seems to be not the case during the recent market volatility since August 2007.

Oil and food prices in recent months are significantly contributing to the inflation and the rising food price inflation is not likely to be stemmed in the near future but will moderate in the later part of 2008. He went on to say that “protracted period” of higher inflation is likely. He clarified that the current high food and energy prices are not likely to have an impact on the prices of other goods and wages. Wages are mostly dictated by capacity utilization and labor market conditions.

He urged various governments in the Euro region to keep the fiscal stability and resist the temptation to increase spending with corresponding rise in revenue and exhorted them to honor the fiscal pact of the union.

The Bank of England lowered its rate by 0.25% to 5.25% after a decision by a nine-member governing body. The pound fell against the dollar and euro after the rate decision. Weak retail sales, falling housing prices, and consumer anxieties have all affected the economic outlook for UK. Interest rates in UK are still high among group of seven wealthiest nations and UK is likely to face weakening economy and rising inflation pressures in 2008.