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News : EU Economy Last Updated: Mar 3, 2011 - 3:36 PM

European Central Bank keeps benchmark rate on hold at 1.0%; Trichet expected to escalate inflation warnings at press conference
By Finfacts Team
Mar 3, 2011 - 1:08 PM

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An image of the planned new headquarters of the European Central Bank in Frankfurt. ECB President Jean-Claude Trichet layed the foundation stone on May 19, 2010. The €850m headquarters will consist of two towers—one 41 floors high and the other 44 floors—joined by a massive conference and visitor centre where a historic fruit-and-vegetable market once stood. It will be completed in 2014. Trichet's eight-year term expires in October 2011.

The European Central Bank (ECB) as expected kept its benchmark interest rate on hold at 1.0%, at a meeting of the governing council in Frankfurt, today. The ECB president, Jean-Claude Trichet, will address a press conference and he is expected to escalate his warnings of the threat of inflation.

Inflation rose to an annual rate of 2.4% last month, exceeding the ECB's target of "below but close to 2%."

Rising oil and food prices have been triggered by the accelerating recovery in emerging markets.

The press conference begins at 1:30 pm Irish time.

Live Webcast (recording after 3pm).

On Wednesday, we reported that concerns are overblown about an early rate hike and US investment bank Morgan Stanley says the ECB will likely stay on hold until early next year.

The argument is that the tough talk on the newswires mainly aims to stabilise inflation expectations and prevent second-round effects. As long as inflation expectations remain well anchored, there is little reason for the ECB to raise rates in the coming months in response to higher commodity prices. However, money market rates e.g. Euribor, will rise further on both an escalation in the ECB's language and on a gradual phasing out of the fixed-rate, full-allotment tenders, notably at the three-month maturity.

Elga Bartsch says that in 2005, the governing council was judging the risks to price stability to be on the upside for at least a year before raising rates. This compares to a concern of the council at present that there is a risk that the risks to price stability could move to the upside. She says the council even stressed a need for vigilance for an extended period back in 2005 before finally raising rates.

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