News | Wednesday, 02 September 2009

Euro zone interest rates to remain at 1 per cent for the rest of the year

Charlot Zahra

The Governing Council of the European Central Bank (ECB) is expected to hold its base rate for the fourth month running at the psychological level of 1.00 per cent tomorrow.
A month ago, as widely expected, the ECB left its monetary policy unchanged in August. Since May, the Central Bank had kept its key policy interest rate at a historical low of 1 per cent.
Analysts have said that despite some positive signs of economic stabilisation in the euro zone, the central bank remained “cautious over the outlook and is unlikely to change its main policy rate for the reminder of the year.”
The ECB’s August meeting saw ECB President Jean-Claude Trichet declaring then that: “The information and analyses that have become available since our meeting on 2 July 2009 confirm our view that the current rates remain appropriate.”
As anticipated, annual HICP inflation in July fell further into negative territory, reflecting mainly temporary effects.
“After a return to positive inflation rates during the second half of the year, we continue to expect price developments to remain subdued over the policy-relevant horizon,” Trichet said.
Recent data releases and survey information still suggested that “economic activity over the remainder of this year is likely to remain weak, although the pace of contraction is clearly slowing down”.
He warned about the possibility of “adverse lagged effects, such as a further deterioration in labour markets, which are likely to materialise over the coming months”
Looking ahead into next year, Trichet explained that after a phase of stabilisation, “a gradual recovery with positive quarterly growth rates is expected.
Available indicators of inflation expectations over the medium to longer term remained “firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2 per cent over the medium term,” he said.
Against this background, the ECB expected “the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households,” Trichet concluded.
In a recent interview with global business news service Bloomberg, Central Bank of Malta (ECB) Governor Michael C. Bonello had said that he was “satisfied” with current the ECB policy settings, which see benchmark interest rates at a record low of 1 per cent.
“We believe that our policy stance is correct at the moment,” Bonello had said. “We have addressed the problem that there was in the money market and interest rates have come down. So from that point of view we are satisfied,” the CBM Governor was quoted as saying.
“Monetary policy works with a lag so the impact of some past decisions is probably still in the pipeline. One has to give time for these various decisions to work,” he had explained.
While Trichet had left the door open to more rate reductions, Bonello had dismissed these suggestions. “There hasn’t been any discussion on lowering interest rates further,” Bonello had told Bloomberg.
Since the beginning of 2009, there had been four interest rate cuts, with a total decrease of 1.5 per cent in the bank’s key policy rate within in the space of five months.
However, it was likely to take some time before it became clear if the liquidity injection was working as the ECB intended and banks were increasing the number of loans they make.
At 1.00 per cent, the ECB’s main rate remained higher than those of other major Central Banks globally. The US Federal Reserve’s target policy rate was between zero and 0.25 per cent, the Bank of Japan’s interest rate stood at 0.1 per cent and the Bank of England’s at 0.5 per cent.



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02 September 2009


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