ECB keep interest rates unchanged

Following today's decision by the ECB to keep interest rates unchanged, Paul Niven, Head of Asset Allocation at F&C, comments: As widely expected, the ECB kept interest rates unchanged today, at 4.25%. Rates were last altered in July, when they were hiked to a seven year high in an effort to curb inflation, which was running at around twice the level that the ECB would tolerate. The ECB, as per its' mandate is choosing to focus on inflationary pressures despite recent bank failures and the coming (or current) recession in the Eurozone economy. IG Metall, the large German labour union, kept the pressure on wage expectations by demanding an 8% increase for its workers, the largest such rise for 16 years.

Trichet had recently stated that there is a "clear separation" between liquidity provision and interest rate policy. In that sense, we can expect ongoing liquidity injections to help alleviate stresses in money markets. The press conference confirmed that the ECB see some reduction in upside risks to inflation although the downside risks to growth are increasing. Trichet stated that "upside risks to price stability have diminished somewhat, but have not disappeared."

Despite the ‘no change' vote today, there is now a widespread expectation that rates in the ECB will be heading downward soon, possibly by the end of the year. This is a function of the pain which is expected to be inflicted on the Eurozone economy from global slowdown and the ongoing impact of deleveraging and credit restraint, both of which should help to quell inflation.