The European Central Bank left rates steady at 4.00% this morning, in line with expectations. However, in ECB President Jean-Claude Trichet’s subsequent monthly press conference, it is clear that the central bank remains hawkish as he said that some council members actually wanted to raise rates.
Indeed, during the Q&A session, Mr. Trichet went so far as to say that there is some potential that the central bank will raise rates next month. Meanwhile, he said in a speech that “risks to price stability have increased further” and that the ECB is in a state of “hightened alertness,” which is a new phrase that we haven’t seen in his commentary. Furthermore, despite recent declines in various measures of Euro-zone services and manufacturing sector growth, Mr. Trichet called the economic fundamentals “sound.” In fact, the ECB is a bit more optimistic on economic prospects for the region, as 2008 growth forecasts were revised up to 1.5% - 2.1%, from 1.3% - 2.1%. On the other hand, the ECB foresees a slowing in the economy in the longer-term, as they revised their 2009 forecasts down tp 1.0% - 2.0% from 1.3% - 2.3%. Overall, it is clear that the ECB has absolutely no intention of cutting rates this year, and in fact, there is greater potential that because the bank’s primary mandate is to focus on price stability, they may actually hike by 25bps next month to 4.25%.
Unsurprisingly, the comments have been supportive of the euro, especially against the US dollar and Japanese yen.