MONETARY POLICY:THE GOVERNING council of the European Central Bank has voted unanimously to leave interest rates unchanged at 1.5 per cent.
A further rate hike before year-end is now looking less likely due to ongoing market turmoil.Speaking yesterday at a press conference following the decision, ECB president Jean Claude Trichet said that the bank’s monetary policy position remains “accommodative” and that inflation risks remain on the “upside”.
“While the monetary analysis indicates that the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures,” he said, adding that, “it is essential that recent price developments do not give rise to broad-based inflationary pressures”.
However, Mr Trichet also said that while the economic outlook for the euro area was broadly balanced, uncertainty was particularly high and downside risks had intensified.
Given the ongoing turmoil in European sovereign debt markets, analysts now suggest that it is unlikely the bank will go ahead with further rate increases this year. It has already increased rates by half a percentage point so far in 2011.
The ongoing macroeconomic news must reduce the likelihood of a further rate rise this year, said Conall MacCoille, chief economist with Davy stockbrokers.
Looking at the reaction of key economic indicators such as the overnight swaps rate, Mr MacCoille said: “It looks as if the market has interpreted Trichet’s comments to mean that a further rate rise is now less likely.”
Other analysts agreed.
“There is still a chance of a further hike this year,” said John Fahy, economist with Ulster Bank Capital Markets, but this is looking “less likely given recent macroeconomic and financial market developments”.
Looking ahead, Mr Fahy added that there should be a more meaningful update on the bank’s strategy next month, when the governing council will have had time to digest its latest staff forecasts.
As to the impact on homeowners, Ciarán Phelan, chief executive of the Irish Brokers’ Association said the sovereign debt crisis constituted a “silver lining”, given how it is likely to keep interest rates low.
Moreover, for homeowners with tracker mortgages the bank’s decision will be welcome, although those with variable rate mortgages remain vulnerable to additional increases.
The Bank of England also left its rate unchanged at 0.5 per cent yesterday.
