News

ECB rate decision welcomed as 'breath of fresh air'[fr][de]

Published: Thursday 6 September 2007 | Updated: Monday 10 September 2007

In a widely anticipated decision, the European Central Bank announced on 6 September that its main interest rates would remain unchanged at 4%. The bank's decision has been interpreted by financial experts as an attempt to prevent economic slowdown caused by the recent turmoil in financial markets.

Background:

Until a little more than a month ago, the European Central Bank (ECB) was expected to raise its main interest rate from 4% to 4.25% in order to limit potential inflation caused by steady growth in the eurozone.

But in early August, international financial markets went into a brief tailspin as a growing number of "sub-prime" borrowers in the US were unable to pay the mortgages on their homes. The situation became potentially critical as the trouble spread to the wider financial markets, affecting some of Wall Street's best-rated investments.

The ECB, along with the US Federal Reserve Bank (Fed), reacted with a massive injection of funds - over €200 billion from the ECB alone - in order to provide cash for short-term borrowing for companies (EurActiv 22/08/07).

The crisis led to extensive debates in EU circles about the need for further regulation of financial markets (EurActiv 06/09/07), and the ECB came under pressure to maintain - or even cut - interest rates in order to prevent economic slowdown and job losses in the EU (EurActiv 30/08/07).

Other related news:

While the ECB's data suggests a "favourable medium-term outlook for real GDP growth" in the eurozone, "the financial market volatility and reappraisal of risk of recent weeks have led to an increase in uncertainty", the bank said in a statement following the decision of the ECB Governing Council to maintain the interest rate unchanged.

In an apparent effort to ride out the market turmoil before adjusting interest rates further, the ECB justified its decision on the grounds that "it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy".

Shortly before announcing its rate decision, the ECB also pumped another €42 billion into short-term money markets to offset the reluctance of banks to offer credit for borrowers, according to the financial press.

While Europe is expected to be affected less by the credit crunch than the US, ECB President Jean-Claude Trichet warned about the possibility of slightly slower growth in the eurozone resulting from "a potentially broader impact from the ongoing reappraisal of risk in financial markets" coupled with higher commodity prices.

Trichet's projections are reflected in an ECB staff working paper, which forecasts slightly lower GDP growth in 2007.

Positions:

French President Nicolas Sarkozy, who had repeatedly attacked the ECB for maintaining the euro at a level that he said was harming exports, welcomed the decision. "This proves that by talking and raising the issue, things can move forward a little," he said while on a visit to Mulhouse in eastern France.

Christine Lagarde, French economics and finance minister, expressed her "satisfaction", saying that the ECB had taken "a wise decision…in light of macroeconomic elements" and "on the basis of a well-controlled inflation".

The Association of German Banks (BdB) also reacted favourably, saying that for the moment priority should be placed on relieving the "tension" in financial markets before any further interest rate changes are made.

UEAPME, the European craft and SME employers’ organisation, welcomed the move as a "breath of fresh air", since a "further hike in interest rates at this stage would have undermined the positive results achieved so far in the eurozone", the organisation said in a press statement.