The European Central Bank on Thursday announced fresh measures to calm financial markets as the countervailing pressures of a soaring euro and rising inflation left its main interest rate firmly on hold at 4 per cent.
August and September's emergency operations to relieve tensions in the three-months money market would be rolled over, with EU60bn ($88bn, £42bn) injected this month and again in December, said Jean-Claude Trichet, ECB president.
The move, agreed by the ECB's governing council meeting in Frankfurt, amounted to a recognition that the global credit squeeze was far from over - and that the uncertainties it had created about the macro-economic outlook would last at least until the end of this year.
At the same time, Mr Trichet went further than he had before in expressing concern about the euro's rise to record levels, saying recent moves had been "undoubtedly sharp and abrupt" and warned that "brutal moves were never welcome". Against this background, the ECB's main interest rate was left unchanged as expected, in spite of its heightened fears about inflation in the 13-country eurozone, which leapt to 2.6 per cent last month.
Mr Trichet said that with financial market turmoil continuing, "a thorough examination of additional information" was needed before drawing conclusions for monetary policy - without specifying how long that would take. The Bank of England also left its main interest rate unchanged at 5.75 per cent onThursday.
"You have some quite powerful countervailing forces," said Julian Callow, economist at Barclays Capital. "The challenge for the ECB will be to appraise them very carefully because if one of them develops strongly, it could tip things over."
Mr Trichet emphasised that the ECB would act as necessary to keep expectations about future inflation rates firmly in check, saying that the "upside risks" to price stability had been "fully confirmed". But he expressed confidence that the inflation "hump" would prove temporary - although it was proving larger and would last longer than expected. "It will be transitory and we will take care [to ensure that it is] transitory," he said.
Mr Trichet hinted the ECB would next month revise up its forecast for inflation in 2008 to a range with a mid-point higher than the ECB's target of "below but close" to a 2 per cent annual rate. Still, the ECB's bias towards tightening monetary policy appeared likely to be countered by the effects of a stronger euro, which has hit $1.47 against the dollar this week, threatening eurozone exports.
At the same time, Mr Trichet acknowledged the downside risks to eurozone growth, which reinforced financial market expectations that the ECB's interest rates would remain at 4 per cent until well into 2008 - and possibly into 2009.
So far the ECB has not altered its "base line" scenario - which sees eurozone growth continuing at robust rates, with the effects of the US slowdown offset by fast growth in emerging market economies. However, it acknowledged on Thursday that market turbulence and higher oil and commodity prices could hit eurozone activity and that "the level of uncertainty surrounding this broadly favourable outlook . . . remains high".
August and September's emergency operations to relieve tensions in the three-months money market would be rolled over, with EU60bn ($88bn, £42bn) injected this month and again in December, said Jean-Claude Trichet, ECB president.
The move, agreed by the ECB's governing council meeting in Frankfurt, amounted to a recognition that the global credit squeeze was far from over - and that the uncertainties it had created about the macro-economic outlook would last at least until the end of this year.
At the same time, Mr Trichet went further than he had before in expressing concern about the euro's rise to record levels, saying recent moves had been "undoubtedly sharp and abrupt" and warned that "brutal moves were never welcome". Against this background, the ECB's main interest rate was left unchanged as expected, in spite of its heightened fears about inflation in the 13-country eurozone, which leapt to 2.6 per cent last month.
Mr Trichet said that with financial market turmoil continuing, "a thorough examination of additional information" was needed before drawing conclusions for monetary policy - without specifying how long that would take. The Bank of England also left its main interest rate unchanged at 5.75 per cent onThursday.
"You have some quite powerful countervailing forces," said Julian Callow, economist at Barclays Capital. "The challenge for the ECB will be to appraise them very carefully because if one of them develops strongly, it could tip things over."
Mr Trichet emphasised that the ECB would act as necessary to keep expectations about future inflation rates firmly in check, saying that the "upside risks" to price stability had been "fully confirmed". But he expressed confidence that the inflation "hump" would prove temporary - although it was proving larger and would last longer than expected. "It will be transitory and we will take care [to ensure that it is] transitory," he said.
Mr Trichet hinted the ECB would next month revise up its forecast for inflation in 2008 to a range with a mid-point higher than the ECB's target of "below but close" to a 2 per cent annual rate. Still, the ECB's bias towards tightening monetary policy appeared likely to be countered by the effects of a stronger euro, which has hit $1.47 against the dollar this week, threatening eurozone exports.
At the same time, Mr Trichet acknowledged the downside risks to eurozone growth, which reinforced financial market expectations that the ECB's interest rates would remain at 4 per cent until well into 2008 - and possibly into 2009.
So far the ECB has not altered its "base line" scenario - which sees eurozone growth continuing at robust rates, with the effects of the US slowdown offset by fast growth in emerging market economies. However, it acknowledged on Thursday that market turbulence and higher oil and commodity prices could hit eurozone activity and that "the level of uncertainty surrounding this broadly favourable outlook . . . remains high".
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