ECB hold rates but to warn about resurgent inflation

ECB hold rates but to warn about resurgent inflation

The European Central Bank left interest rates at an historic low of 1 per cent Thursday but is expected to step up its warning about the threat posed by resurgent inflation, DPA reported.

This comes after official data released Monday showed annual inflation in the 17-member eurozone spiked up to a two-year high of 2.4 per cent this month from 2.2 per cent in December amid rising energy and food costs.

The result is that analysts are expecting ECB chief Jean-Claude Trichet to adopt a tough stance on fighting inflation at his regular press conference Thursday following the meeting of the bank's 23-head governing council.

The January increase in inflation pushed annual consumer prices in the currency bloc further away from the ECB's goal of keeping inflation below - but close to - 2 per cent.

As a result, this in turn has helped to fuel market speculation that the ECB might be forced to consider an earlier-than-planned increase in the bank's benchmark refinancing rate.

Already tough talk from top ECB officials about renewed inflationary pressures has helped to drive the euro up to a two-and-a-half month high of more than 1.38 dollars. The euro has gained about 7 per cent since the start of the year.

Apart from market speculation about the ECB possibly leading the world's major central banks in moves to higher interest rates, signs that the tensions unleashed by Europe's debt crisis have abated in recent weeks have also helped to bolster the common currency.

This week's deliberations by the ECB's governing council also comes ahead of a meeting of the European Union leaders on Friday which is expected to formally launch a new push to bolster the rescue mechanism for heavily indebted eurozone states.

The ECB has held borrowing costs at their present level since May 2009.

Up until recently, the ECB was seen by analysts as not being in any rush to jeopardize the eurozone's recovery or accentuate the debt crisis by raising borrowing costs.

But now a rise in oil prices above the key 100-dollar mark on the back of the political upheaval in Egypt risks threatening to accentuate global inflationary pressures. Fighting inflation represents the central plank of the ECB's charter.

Underlying the ECB's dilemma about inflation, annual industrial producer prices in the eurozone rose by 5.3 per cent - the fastest pace in more than two years - the European Union's statistics office said Wednesday.

Going forward, the new inflationary threat could also complicate Europe's struggle to finally to bring to an end the region's debt crisis, which has hit cash-strapped states like Greece, Ireland, Portugal and Spain.

Any hike in borrowing costs would further hamper the efforts of the eurozone's cash-strapped states to cut high debt-and-deficit levels.

Moreover, rising inflation could hit consumer spending just when the weaker eurozone nations need stronger domestic demand to power economic growth to help them battle their way out of the crisis.

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