ECB keeps interest rates on hold despite cut speculation

The ECB has kept interest rates on hold following the latest meeting of the governing council.

Ahead of yesterday’s ECB meeting, there had been speculation about a possible rate cut when the bank’s president, Mario Draghi, said on Wednesday that the “risks of inflation are currently very low over the medium term”.

“Some market participants had interpreted this as a dovish signal, even worthwhile breaking the so-called Purdah period ahead of ECB meetings. [Yesterday’s] press conference shows that the speculations were premature. The ECB’s bias remains unchanged.

Of course, there still is a bias towards easing but it is not an imminent rate cutting bias,” said Carsten Brzeski, ING economist.

Mr Draghi said inflationary pressures were finely balanced throughout the region. The impact of higher energy prices and indirect taxes are offset by weak economic activity.

But there are no signs that deflationary pressures are taking hold in certain eurozone countries, he said.

“Euro area annual HICP inflation was 2.5% in Oct 2012, according to Eurostat’s flash estimate, compared with 2.6% in September and August.

“On the basis of current futures prices for oil, inflation rates could remain at elevated levels, before declining to below 2% again in the course of next year.

“Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate. Current levels of inflation should thus remain transitory. We will continue to monitor closely further developments in costs, wages, and prices,” he said.

Mr Draghi also said risks to the outlook for price developments continue to be broadly balanced. The main upside risk is more indirect taxes on the back of ongoing fiscal consolidation. The main downside risk is weak economic growth.