Thursday, June 5, 2008

ECB leaves rate unchanged at 4 percent in June 2008

The ECB left its key interest rates unchanged at 4 percent. In his introductory statement Jean-Claude Trichet, President of the ECB, reiterated his concern with a more protracted period of higher inflation. In the accompanying press conference he also said that the ECB could hike by a "small amount" at the July meeting in order to secure the solid anchoring of inflation expectations.

Looking ahead, on the basis of current futures prices for these commodities, the annual HICP inflation rate is likely to remain above 3% for some time to come, before moderating only gradually in 2009. We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than previously anticipated.

Consistent with this view, the Eurosystem staff projections foresee average annual HICP inflation at between 3.2% and 3.6% in 2008 and between 1.8% and 3.0% in 2009. Compared with the March 2008 ECB staff projections, the ranges projected for inflation in 2008 and 2009 are markedly higher, reflecting mainly higher oil and food prices and increasingly inflationary pressures in the services sector.

Securing a firm anchoring of medium and long-term inflation expectations in line with price stability is of the essence.

This passage included in the May08 statement was left out:
We believe that the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the coming weeks.

I found it also interesting that Trichet emphasizes that the projections of the Council are based on the assumption that oil and non oil commodity prices have basically topped out and will not move higher over the projected horizon. That is somewhat in contrast to Fed Pres Yellen and other rate setters who think that steady commodity prices, albeit at current high levels, will bring down inflation over the medium term. This is a serious problem of misinterpreting the current and present threat from inflation. Bernanke by emphasizing inflation and its link to the weak dollar is acknowledging some of the recent counterproductive developments in this sector. But talk is cheap and it remains to be seen if he can also walk the walk. Investors clearly appreciate a sound and consistent policy as seen in the 2 cents move higher of the euro against the dollar today.

click to enlarge

source: Introductory statement
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 5 June 2008

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