ECB keeps interest rate fixed

The European Central Bank kept its key interest rate fixed at 3.25 percent on Thursday as anticipated, but intended to change rates in December. The bank gave a signal to the markets that it will most likely increase the interest rate by a quarter of a percentage point, in order to keep the inflation pressures under check.

Saying that vigilance was needed on inflation risks, ECB President Jean-Claude Trichet confirmed the market outlook that next month the credit costs will rise to 3.5 percent as the business and consumer confidence in Germany and France are elevating and investment is thriving world-wide. "Strong vigilance remains of the essence," Trichet said.

Inflation dropped to an annual 1.6 per cent, from 1.7 per cent in September due to a lower inflation in oil prices in October. The manufacturing data revels that the manufacturing sector is continuously expanding and with this mounting growth in the Eurozone, ECB feels that the pause will not last long.

A fall in the German unemployment was reported by the data. “For the time being, positive growth data is likely to outweigh benign inflationary news,” said Stuart Bennett at Calyon. He went on to add, “This not only makes a December rate hike likely, but also supports our view that, if the good news on the economy continues, a further rate hike will be deemed necessary in the first quarter next year.”

Trichet maintained that he would not counter the market-expectations until the end of the year and also refused to give any hints about the interest rate outlook for 2007. "I will say nothing that would distract the present market expectations as regards what could happen until the end of the year," Trichet said. "Over and above our next rendezvous, all I can say is: we will do all that is necessary for price stability."

Money supply growth was much faster than the bank would like. The ECB observes developments in the money supply because it sees a link between the amount of liquidity in the economy and future inflation.

"It comes straight from the horse's mouth that more ECB rate tightening is on the cards," Bear Stearns economist David Brown said. "Trichet did not beat around the bush and was very specific at the press conference that there is a need for strong vigilance, rates are too low, liquidity growth is too strong and policy remains too accommodative.

The ECB has hoisted its interest rates five times since December 2005, each time by a quarter of a percentage point. The last move, which came at the beginning of October, took to 3.25 percent.