As expected the European Central Bank decided to keep the interest rate unchanged at 1.5%; Jean-Claude Trichet, president of ECB, addressed the current risks in the Euro Area including the bank’s new predictions of the GDP growth in Euro Area for 2011 and 2012. He also said he expects the inflation rate to remain above the 2% target of ECB in 2011.
The heads of European Central Bank convened today and stated they will keep the Euro Area interest rate at its current level of 1.5%. This is after the ECB raised the rate by 0.25 percent points three months back.
The current inflation in the Euro Area had slightly fallen in recent months to 2.5% in annual terms, which is still above the 25 target inflation rate. According to Trichet this factor is less of a consideration in the current decision to keep rates unchanged because the inflation pressures seem to be contained at this time:
“Inflation has remained elevated and is likely to stay above 2% over the months ahead before declining next year. At the same time, the underlying pace of monetary expansion continues to be moderate, while monetary liquidity remains ample. “
One of the prime concerns is the slowdown in the growth rate of the Euro Area that grew by only 0.2% (Q-2-Q) in the second quarter of 2011. Trichet explained the main factors that could further damp Euro Area’s growth rate in the near future:
“Looking ahead, a number of developments seem to be dampening the underlying momentum in the euro area, including a moderation in the pace of global growth, related declines in equity prices and in business confidence, and unfavorable effects resulting from ongoing tensions in a number of euro area sovereign debt markets. As a consequence, real GDP growth is expected to increase very moderately in the second half of this year.“
As a result, the ECB economists revised their projections for the economic growth in 2011 to range between 1.4% and 1.8%, and between 0.4% and 2.2% for 2012. These revised projections are much lower than the market had expected.
The chart below shows the changes in interest rate and EURO inflation rate in 2010 and 2011 (UTD).
The chart clearly shows that since April 2011 the Euro Area inflation rate changed direction to a moderate downward trend. This decline is inline with the recent raises of ECB interest rates during 2011 from 1% to 1.5%.
The financial markets soon reacted to the news and Euro to USD conversion rate is being traded down. This news didn’t seem to affect much the commodities markets as gold and crude oil prices are currently traded up.
Euros to USD is currently traded down at 1.4010 a 0.6244% decrease as of 14:49*.
USD to Canadian dollar exchange rate is traded up at 0.9840 a 0.0684% increase as of 14:49*.
Current Nymex crude oil price, short term futures (October 2011 delivery) is traded up by 0.41%, at $89.71 per barrel as of 14:39*.
Current gold price, short term futures (October 2011 delivery) is traded at $1,858.80 per t oz. a $41.2 increase or 2.27%, as of 14:35*.
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