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News : EU Economy Last Updated: May 5, 2011 - 2:37 PM


European Central Bank expected to keep benchmark rate unchanged at 1.25% today
By Finfacts Team
May 5, 2011 - 6:14 AM

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Jean-Claude Trichet, President of the European Central Bank and Iveta Radicova, Slovakian Prime Minister, Brussels, March 24, 2011.

The European Central Bank is expected to keep its benchmark interest rate unchanged today at the meeting of the 23-member governing  council in Helsinki. In London, in response to evidence of a fragile economy, the Bank of England's Monetary Policy Committee is expected to keep the bank's key interest rate at the 1694-year low of 0.5%.

In Helsinki, Jean-Claude Trichet, the ECB president, may signal the near-term course of planned interest movements and if he uses the code "strong vigilance" on inflation, the markets will pencil in another rate hike in June.

At the April meeting, the central bank raised rates for the first time in almost three years.

Annual inflation rose to 2.8% in April, compared with the target rate of "below but close to" 2% and Eurozone producer price inflation was reported this week to have accelerated to 6.7% in March - - the fastest since September 2008.

Banca d'Italia governor, Mario Draghi, the frontrunner to replace Trichet from November, said last month:  “Monetary policy must take into account the emergence of inflationary tensions, pushed by rising food and energy prices.”

This week, a €78bn EU-IMF bailout of Portugal was agreed and an ECB report signaled that government bond buying programme had not been active for the past five weeks. This reflects the risks the central banks has in holding Greek, Irish and Portuguese debt.

The ECB was unable to mop up liquidity in the market this week to offset its bond holding of €76bn because Eonia market overnight rates were higher than the benchmark rate of 1.25%.

The exercise is only a sop to German monetarists but with Portugal having been provided with support, the bond buying programme maybe at an end.

Trichet will address a press conference at 12:45 pm Irish time.

In London, the Bank of England will announce its rate decision at noon.

Eurozone, a Three-Speed Economy: Economist; “You really have a (first) group led by Germany, and including countries like Finland, that are really outperforming the rest of the European monetary union,” Jean-Michel Six, managing director and chief European economist at Standard and Poor's, told CNBC. “France, Italy, sort of in the middle, benefiting from strong growth, strong demand in Germany, and then you have a third group – the periphery – with Spain, Portugal, Greece, Ireland, still stuck in a very slow growth, or in recession,” he said:

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