ECB leaves rates unchanged
FRANKFURT, Germany (AP) — The European Central Bank is expected Thursday to signal that another rate increase is coming as early as next month, a step that would underscore the bank's determination to fight inflation even if it increases the burden on heavily indebted Greece, Portugal and Ireland.
Following the widely-expected decision to keep its main interest rate unchanged at 1.25 percent, the markets are waiting for ECB President Jean-Claude Trichet's news conference to see if he will use the phrase "strong vigilance" to describe the bank's stance on controlling inflation.
Those words are often code for a rate increase at the next month's meeting.
The prevailing view in the markets is that the bank will follow up April's first interest rate increase in nearly three years with another quarter point rise in July.
Most economists think there will be at least two more rises this year as the bank tries to bring inflation back towards target. Inflation in the 17 countries that use the euro is currently running at 2.7 percent — above the bank's goal of just under 2 percent.
Over the past few months, Trichet has spelled out the bank's determination to prevent higher oil and food prices from being embedded in the eurozone economy through higher wage settlements.
Inflation and interest rates will not be the only point of interest at the post-decision news conference though. Trichet will likely face questions about EU efforts to keep Greece from defaulting on its debts.
Germany is calling for Greece to swap maturing bonds for ones with longer maturities, even though the ECB has previously opposed to such a move. Bank officials have said it could harm the finances of Greek banks that hold the bonds and make it harder for other countries to borrow.
Greece got a euro110 billion ($161 billion) package of bailout loans last year from the other eurozone countries but is still struggling to come up with the money to pay its debts. Cut off from bond markets because it is viewed as too risky, it is dependent on credit from other euro countries and the International Monetary Fund. European officials are working on another package of aid.
An interest rate increase could make life harder for Greece, as well as Portugal and Ireland, which have also received rescue loans. But the debt crisis for now is confined to three small countries, while the rest of the eurozone is mostly enjoying solid growth that argues for higher interest rates to prevent growth from leading to inflation.
For now, the ECB is moving ahead of the U.S. Federal Reserve, which shows no sign of raising its key rate from 0-0.25 percent, and the Bank of England, which kept its main rate unchanged at a record low 0.5 percent earlier Thursday.