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Highlights
As expected, the European Central Bank left its policy interest rate at 3.25 percent today. But in his opening statement at his press conference, President Jean Claude Trichet indicated that there would be an interest rate increase at the December meeting. He used the phrase "strong vigilance" in describing the Governing Council's posture towards price stability risks. That phrase has been used in the past to indicate that a rate increase would be forthcoming at the next meeting. The ECB last increased rates at its October meeting. Although October's reading of the flash harmonized index of consumer prices was below the ECB's 2 percent ceiling for the second month, Trichet said that inflationary pressures were on the upside. The latest HICP reading was influenced by dropping gasoline prices.
In his introductory comments, Trichet said:
"On the basis of our regular economic and monetary analyses, we decided at today's meeting 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 in October. It has also confirmed that strong vigilance remains of the essence so as to ensure that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. With the key ECB interest rates at still low levels, 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, it will remain warranted to further withdraw monetary accommodation. Indeed, acting in a firm and timely manner remains essential to ensuring price stability over the medium term. As emphasized on previous occasions, this is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area."
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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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