European Central Bank president Jean-Claude Trichet warned today that the euro zone economy faces short-term inflationary pressure as the European Central Bank has left its key interest rate unchanged at a record low of 1 per cent.
Mr Trichet said that although these pressures should be contained in the long-term close scrutiny is warranted.
Euro zone inflation jumped last month to 2.2 per cent, the first time in two years it has risen above the central bank's target of just below 2 per cent.
"We see evidence of short-term upward pressure on overall inflation, mainly owing to energy prices, which has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon," Mr Trichet told a news conference.
He added that latest data suggested the euro zone's recovery had momentum although a high degree of uncertainty persisted.
The ECB said the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain at 1 per cent, 1.75 per cent and 0.25 per cent.
The key interest rate has been unchanged since May 2009.
Analysts at Ernst & Young said the ECB should keep the current monetary policy stance for the foreseeable future, warning that the Eurozone had not yet turned the corner.
"The ECB Governing council probably entered the room somewhat relieved by the results of yesterday's Portuguese auction, and got further relief from news about successful Spanish and Italian auctions. That there is some appetite for these governments' debt suggests that the situation is not as dire as may have been feared," said Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast.
"But it is a sign of the times, that interest rates at 6.7 per cent are deemed a 'success' for the Portuguese auction. These are unsustainable borrowing rates for the Portuguese government which faces large redemptions in the spring. The euro zone has not turned the corner of this crisis yet."
Separately, the Bank of England today maintained emergency stimulus for the economy as officials judged prime minister David Cameron's spending squeeze this year will help tame the fastest inflation since he took office.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, held its bond plan at £200 billion as forecast by all 39 economists in a Bloomberg News survey. The bank left its main interest rate at a record low of 0.5 per cent as forecast by all 61 economists in a separate poll.
Mr Cameron said this week it's "concerning" that inflation is above the government's 3 per cent limit at a six-month high. Policy makers have held bond purchases at the current level for a year, saying government spending cuts will curb price gains driven by higher taxes and oil. Construction and services shrank in December, surveys show, suggesting a fading recovery.
Additional reporting: Reuters, Bloomberg
