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Highlights
As widely expected, the European Central Bank kept their key interest rate at 3 percent today. It had increased the rate to that level on August 3 when the governing council broke with pre-holiday tradition and met in person in Frankfurt rather than by conference call. Both the HICP and M3 money supply continue to be well over target levels of 2 percent and 4.5 percent respectively. The ECB has paused after each of its previous increases in contrast to the Federal Reserve that had increased the target fed funds rate at each of its meetings until June 29, when it paused. August flash HICP was up 2.3 percent on the year while M3 money supply soared by 8.3 percent, almost double the Bank's target growth rate. And the ECB is known to be concerned at the rapid pace of credit growth, dominated by increased household borrowing.
In his post-meeting press conference statement, ECB president Jean Claude Trichet said that 'strong vigilance' is required. In the past, these words have preceded an interest rate increase in the following month. In his prepared statement Trichet said
"On the basis of our regular economic and monetary analyses, at today's meeting we decided to leave the key ECB interest rates unchanged. The information that has become available since our last meeting has further underpinned the reasoning behind our decision to increase interest rates earlier this month. It has also confirmed that strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained. With key ECB interest rates at still low levels in both nominal and real terms, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative. If our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation will remain warranted. Indeed, acting in a timely manner to contain risks to price stability remains essential to ensure that inflation expectations in the euro area are kept solidly anchored at levels consistent with price stability. Such anchoring of inflation expectations is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area."
ECB staff projections for growth and inflation were raised for this year and 2007. He said
"This outlook is also reflected in the new ECB staff macroeconomic projections, which for the first time include Slovenia as part of the euro area projections for 2007. The projections foresee average annual real GDP growth in a range between 2.2% and 2.8% in 2006, and between 1.6% and 2.6% in 2007. In comparison with the June Eurosystem staff projections, the ranges projected for real GDP growth in 2006 and 2007 have been revised upwards, mainly reflecting the stronger growth recorded in the first half of this year, along with continued positive signals from a number of other indicators."
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Trends
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The ECB monitors two "pillars" of monetary policy - the harmonized index of consumer prices (HICP) and M3 money supply - in its objective to control inflation. The ceiling for HICP growth is 2 percent. M3 growth is targeted at a 4.5 percent growth rate. The Bank has had trouble controlling both but has been reluctant until recently to increase interest rates. In November, the flash HICP was 1.8 percent when compared with the same month a year ago. Money supply growth expanded at 8.4 percent rate for the three months ending in October when compared with the same three months a year earlier. The ECB increased interest rates in December 2005 for the first time since June 5, 2003. It followed with increases in March, June, August and October. With today's increase, the ECB's current policy interest rate is 3.5 percent. |
Data Source: Haver Analytics
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