ECB expected to hold key rate, despite inflation threat

Business Materials 10 April 2008 08:25 (UTC +04:00)

The European Central Bank (ECB) is expected to hold its key rate at 4 per cent when the governing council meets Thursday, despite rising inflation in the eurozone on the back of higher energy, food and other commodity prices. ( dpa )

The ECB has held rates at a six-year high of 4 per cent throughout the global financial crisis that erupted in August last year in the wake of the surge in risky subprime US mortgage defaults.

Europe's central bankers faced an "unenviable" task, Germany's Handelsblatt said ahead of the decision.

"On the one hand, inflation at 3.5 per cent is very high. On the other, the global economic outlook grows increasingly gloomy," the business daily said.

It predicted the ECB would not readily surrender the reputation it had gained as a credible inflation fighter and would opt to keep the key refinancing rate on hold.

The ECB finds itself out of step with the US Federal Reserve and the Bank of England on easing rates to boost faltering economic growth.

Eurozone economic growth - particularly in the core economy of Germany - has shown itself robust, despite the financial crisis.

Nevertheless, the International Monetary Fund (IMF) said Wednesday the bank should moderate its policy.

The ECB could "afford some easing of the policy stance" as the economic downturn was expected to ease inflationary pressures in 2009, the IMF said.

In its report on Germany, published Wednesday, the Organization for Economic Cooperation and Development (OECD) predicted German growth would come in at 1.8 per cent this year, marginally up on the government's own prediction.

Many analysts predict the ECB will cut - but not this time round.

In a note to clients last week, German Commerzbank economist Joerg Kraemer said he expected eurozone interest rates to fall to 3.5 per cent by the end of the first quarter next year.