The European Central Bank (ECB) has voted to keep eurozone interest rates on hold at 3.25% for November, a decision that was widely expected but is widely expected to raise rates by one quarter of a percentage point in December, as it continues to keep a close eye on inflation.
Although eurozone inflation fell in October to 1.6%, the ECB has hinted further rate rises are needed.
ECB boss Jean-Claude Trichet said “strong vigilance” remained vital. “Strong vigilance remains of the essence so as to ensure the medium to long term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability,” said Trichet at a press conference in Frankfurt.
Despite last month’s inflation fall, the ECB is concerned that lower oil costs could refuel upward price pressures. It also sees soaring German and French business and consumer confidence as a further inflationary risk.
The ECB which last raised rates last month – by one-quarter of a percentage point – has set an inflation target of 2% or below.
December’s expected one-quarter of a percentage point rise to 3.5% would be the sixth increase in eurozone rates during 2006.
The ECB is raising rates as the fastest economic growth in six years threatens to push inflation above the central bank’s 2 percent limit next year. Some council members have indicated further rate increases may be needed next year to contain risks to price stability.
The inflation rate fell to 1.6 percent in October, the second straight month it has been below the ECB’s 2 percent limit, as oil prices retreated from a record. The ECB on Aug. 31 forecast that inflation will average about 2.4 percent this year and next, breaching its limit for an eighth year.
The bank is concerned economic growth will fuel wage demands and give companies scope to increase prices. Dutch central bank President Nout Wellink said in an interview published Oct. 23 that interest rates are “still very low” and the economy is “gradually reaching full capacity, which will of course somewhat increase pressure on wages and prices.”
Trichet has been reluctant to give investors a steer on the likely direction of rates next year. The ECB’s 18- member governing council will have revised growth and inflation forecasts at its December meeting, which Austria’s Liebscher has said will be decisive for determining the rate outlook next year.
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