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| A meeting of the Governing Council of the European Central Bank |
The Governing Council of the European Central Bank agreed at its meeting in Frankfurt today, to keep its benchmark interest rate on hold at 4.00%.
ECB President Jean-Claude Trichet will outline the reasons for the Council's decision at a press conference in the early afternoon and he is expected to say that risks to price stability remain on the upside.
Eurozone inflation in December remained at the elevated level of 3.1% because of surging food and energy prices and ECB President Jean-Claude Trichet recently said that what he had termed an inflation "hump," is likely to be more protracted than he had expected last November.
The ECB's inflation target is "below but close to" 2% and following the meeting of the Governing Council in December, Trichet said that some members had called for a hike in interest rates. However, it's likely that the Governing Council will decide today to keep its benchmark rate at 4%. Economic growth in the Eurozone is moderating and on Wednesday, three European economic institutes forecast that in the second quarter of 2008, GDP will grow at an annual rate of 2.1% compared with the expected performance in 2007 of 2.7%.
The ECB President will report on the easing of the credit crunch following the provision of emergency funding of €348.6 billion to the Eurozone banking market - more than a half trillion dollars - on Dec 17th. In every trading day since, the 3-month Euribor inter-bank rate has fallen and on today Thursday (Jan 10) is 4.591%. In early June, it was at 4.135% following the last hike in the benchmark rate to 4%. On Dec 17th, the 3-month rate was 4.979%. The 1 month rate was at 4.930% compared with 4.206 today. While the evidence of an abating credit crunch may have prompted a consensus on the Governing Council for a benchmark hike, the ECB cannot be totally oblivious to the likely trends in the US and UK.
On Tuesday, US Investment bank Goldman Sachs said that the US economy may already be in recession and it forecast a fall in the federal funds rate from the current level of 4.25% to 2.50%.
In Frankfurt this afternoon, ECB President Jean-Claude Trichet will warn again about the risk of "second-round effects," - wage demands - that would be triggered by the current spike in Eurozone inflation.
The Financial Times reports today that German government and union officials gather on Thursday in the baroque town of Potsdam outside Berlin to start wage negotiations for the country’s 1.3m civil servants, kicking off what the head of the country’s largest trade union predicted would be a year of “mega-wage deals”.
The FT says that after years of wage stagnation in Europe’s biggest economy, calls for substantial pay increases are growing louder – and prompting warnings from economists about the potential impact on jobs and inflation.
Finfacts will carry analysis on the Trichet press conference, in the early afternoon.
The press conference begins at 1:30 p.m. Irish and UK time; 2:30 p.m. Frankfurt time:
Live webcast of press conference from 1:30 p.m. Recording available from about 3:00 p.m Irish Time.
(If you have broadband, choose an option such as 300k RealVideo when window opens).
