ECB fails to follow Bank's lead and holds rates

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The gap between interest rates in Britain and the continent widened yesterday, as the European Central Bank failed to follow the Bank of England's hike and left euroland's main rate at 2 per cent.

In an assured performance at his first press conference as president of the ECB, Jean-Claude Trichet said rates were "appropriate". He refused to comment on the UK's decision to increase its main rate to 3.75 per cent, now almost twice that of euroland. "I would not like to respond," said M. Trichet, adding: "That would be the same if you ask me about Australia [which raised rates earlier this week]."

Seen as a stronger and more experienced communicator than his predecessor, Wim Duisenberg, M. Trichet stressed continuity of policy as he answered questions for almost an hour at a press conference in Frankfurt. Speaking mainly in fluent English, the new ECB president highlighted the bank's mandate to secure price stability, which disappointed those who thought M. Trichet might seek to relax the stance to pursue growth. Inflation is likely to "hover" at around 2.1 per cent in euroland, before declining, he said. On growth he said: "We expect that forthcoming data on euro area production and demand will confirm that a gradual recovery has started."

Claudia Henke, the senior economist at Dresdner Bank in Frankfurt, said the rate decision was no surprise. "What we heard from M. Trichet indicates that no further interest rate cut is on the agenda," she said. "On the other hand we had no indication that an early rate hike is on the agenda. In my view the rate-hike cycle will begin mid-next year."

This contrasted with London where the Bank of England blamed spiralling household borrowing and rising house prices for its decision to raise rates for the first time in almost four years. "Neither household spending nor the housing market have slowed by as much as the committee expected," it said. But it calmed fears that it had embarked on a prolonged cycle of rate rises, as the financial markets believe, saying the pattern of recovery in the world economy was "uneven".

Digby Jones, the director general of the CBI, said: "The economic recovery is still at an early and extremely fragile stage. It would be misguided to opt for overly aggressive monetary tightening before that recovery has taken hold."

On the other side of the Atlantic, Alan Greenspan, the chairman of the Federal Reserve, hinted he was becoming more optimistic about the American economy - although rates would stay on hold for some time to come. He said the "odds increasingly favoured a revival of job creation", emphasising that he saw promising signs for the economy. But he said mounting budget deficits posed a long-term threat - a warning echoed by his ECB counterpart in Frankfurt.

M. Trichet called on France and Germany to meet commitments under the euro's rulebook, the Stability and Growth Pact, to reduce their budget deficits. Under its provisions, governments must keep budget deficits under a limit of 3 per cent of GDP, something France and Germany will fail to do for three consecutive years. Asked if he would be more likely than Mr Duisenberg to engage in "dialogue" with finance ministers pressing for rate cuts to stimulate growth, M. Trichet, a former governor of the Bank of France, promised "exactly the same very strong tradition" as that of his predecessor.

His confident public performance won plaudits in Frankfurt. "He knows this work, he is an experienced central banker," said Ms Henke.

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