BERLIN -- The
European Central Bank
held its interest rates steady as anticipated on Thursday, despite the increased inflationary pressures presented by the euro's renewed slide.
The ECB will continue to hold its refinancing operations as a variable rate tender with a minimum bid rate of 4.75%. The bank's governing council had been expected to keep rates steady after hiking euro area borrowing costs by a quarter of a percentage point only two weeks ago.
Europe's monetary authorities met Thursday in Paris, one of the two regularly scheduled meetings away from the ECB's Frankfurt headquarters each year. However, the change of venue shouldn't protect ECB President
from a rough question-and-answer session, following his recent comments in a newspaper which seemed to indicate the world's major central banks may not be prepared to follow up their intervention in the foreign exchange markets last month with more coordinated action to support the euro.
On Wednesday, the euro shed more than 2 cents vs. the dollar to levels that prompted the initial intervention. After Thursday's inaction, the euro was trading slightly higher at $0.8407. Should the euro not recover on its own and barring further central bank intervention, the ECB may have to ratchet rates higher than had been previously expected in order to contain inflation. As the euro sags, dollar-denominated goods such as oil become more expensive, raising the risk of importing inflation from abroad.
Many observers believe the ECB has nearly reached the top of its tightening cycle, however, the slumping euro threatens a nasty scenario where higher rates choke off Europe's prospects for growth as the bank has to hike borrowing costs to stem inflation. Duisenberg may be in for a particularly rocky ride if it looks like his comments contributed to such an unpleasant situation.
The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria.