The European Central Bank (ECB) declined to raise interest rates on Thursday, keeping them at 1% despite an inflation rate within the euro zone that has risen above 2.4%.
This is the third month in a row that the inflation rate has exceeded the ECB’s target rate of below 2%. Jean-Claude Trichet, president of the ECB, would have to change his tone to deliver a stern message on inflation. As previously reported by AdvisorOne, after a statement earlier in the year that sent markets scurrying for cover, Trichet had backed off. There was also an expectation that the ECB might begin to withdraw crisis support measures at its Thursday meeting.
Reuters reported that economists had expected the interest rate to stay the same at Thursday’s meeting. However, in a poll, it found that the median expectation was for rates to hold steady till the fourth quarter of 2011, despite financial market investors apparently believing that the change will come in the third quarter instead.
Even though borrowing from the ECB has fallen by 100 billion euros ($139.392 billion) since the beginning of the year, Francesco Papadia, head of market operations at the ECB, said in the report that money markets were polarized and peripheral nations still dependent on the ECB for their liquidity. An anonymous money market desk head was quoted as saying, "The ECB will definitely be pleased with the reduced demand for liquidity. The wording from policymakers over the last week has been very clear that they will resume the exit [from crisis measures]."
While new staff economic projections will be released, it is expected by analysts that those figures will be revised upward thanks to inflation and growth. The figures also will not account for the runup in oil prices because of unrest in the Middle East/North Africa (MENA) region.