ECB officials to hold interest rates

ECB officials edged back from a threat to raise interest rates, saying markets have over-reacted to their change in tone on inflation.

“The Governing Council of the ECB sees presentinterest rates as adequate,” council member Ewald Nowotny said at an event in Budapest yesterday. “We do not see a need for an interest rate change in the foreseeable future.” Bundesbank president Axel Weber also said he expects inflation to remain below the ECB’s 2% limit in the medium term, softening his language on the risks to price stability.

“It looks like the ECB is now trying to fine-tune market expectations,” said Laurent Bilke, global head of inflation strategy at Nomura International in London, who used to work as a forecaster at the ECB. “The market didn’t get the ECB completely right, but at the same time policy-makers will not be successful in telling the market that there hasn’t been a shift in the policy stance.”

The euro has risen five cents against the dollar since ECB president Jean-Claude Trichet last week warned that the central bank will act if needed to contain inflation risks, which he said “could move to the upside”.

Nowotny joins Athanasios Orphanides of Cyprus in suggesting markets may have over-reacted to the comments.

A stronger currency could undermine European exports just as the region grapples with a sovereign debt crisis that’s forced governments to cut spending, damping the outlook for economic growth. Higher ECB rates would also increase the burden on debt-strapped nations. The central bank has held its benchmark interest rate at a record low of 1% since May 2009.

Weber said in a speech in Frankfurt yesterday that, while inflation risks “could increase”, they are still “more or less balanced” and prices should remain contained in the medium term.