It is now obvious the economies in the euro zone are on the brink of recession and as a result, the European Central Bank (ECB) kept interest rates unchanged at 4.25%, a 7-year high, in order to fight inflationary pressures in the euro zone. Officials of the ECB policy makers met in Frankfurt today and decided to kept rates unchanged. This decision was predicted by most economists surveyed. According to analysts, the ECB will likely wait until the end of the first quarter of next year to decide whether or not to reduce interest rates.
In the Euro zone, workers are demanding higher wages to offset the higher food and energy cost and the ECB want to avoid a wage-price spiral. The ECB raised interest rates last July and some officials commented that further interest rate hikes will be necessary if inflation risks continue to increase. However, the economies of the Euro zone contracted during the second quarter and inflationary pressures slowed because of lower oil prices.
Jean-Claude Trichet will hold a press conference today at 2:30 pm to comment on the rationale for the decision to keep interest rates at 4.25%. It is also expected that Trichet will comment on changes to the collateral requirements of the ECB for lending to banks. The Bank of England kept interest rates unchanged at 5%.
While oil prices have dropped by 26% from a high of $147.27 on July11, they are still 46% higher than the same time last year. Inflation rate in the Euro zone dropped to 3.8% in August, compared to 4% in July.