Frankfurt- The European Central Bank (ECB) kept rates on hold at 4.25 per cent Thursday with with the ECB chief Jean-Claude Trichet unveiling new forecasts revising down the economic growth outlook and setting higher inflation projections. Speaking at his regular press conference, Trichet said the central bank expected growth to slump into "a trough" during the second half of the year before staging "a progessive recovery."
The ECB chief went on to say that the bank's 21-head rate-setting council had no bias on monetary policy but was particularly concerned about the high inflation triggering a wage-price spiral.
The Frankfurt-based ECB raised its benchmark refinancing rate by 25 basis points in July to ward off the threat posed by resurgent inflation.
The so-called staff projections outlined by Trichet pointed to economic growth slowing this year between 1.1 and 1.7 per cent averaging 1.4 per cent, before sliding to between 0.6 per cent and 1.8 per cent (1.2 per cent) in 2009.
In June, the ECB staff forecasts predicted economic growth this year of between 1.5 per cent and 2.1 per cent to average 1.8 per cent, slowing to between 1 and 2 per cent (1.5 per cent) in 2009.
At the same time, inflation is tipped to rise to between 3.4 per cent and 3.6 per cent (average 3.5 per cent) this year and 2.3 per cent and 2.9 per cent (2.6 per cent) in 2009.
The June staff projections forecast inflation coming in at between 3.2 per cent and 3.6 per cent (average 3.4 per cent) this year to between 1.8 and 3 per cent (2.4 per cent) next year.
Thursday's ECB decision to leave monetary policy unchanged was in line with analysts' forecasts.
Ahead of the ECB's rate decision, the Bank of England announced that it also left rates on hold for the fifth month in a row at 5 per cent as high inflation limits the bank's scope for cutting borrowing costs in response to slumping economic growth and falling house prices.
At 4.4 per cent, inflation in Britain is now more than double the London-based central bank's 2 per cent target.
Inflation is expected to reach 5 per cent this year, while forecasts this week predicted that Britain's economy was heading for recession.
However, a growing number of economists believe that the Bank of England's nine-member monetary committee headed up by Governor Mervyn King, will be forced to trim the cost of money by the start of the new year to shore up economic growth.
This week's ECB and Bank of England meetings came at a critical moment for the European economy as analysts attempt to assess the damage to growth caused by the global financial crisis, high inflation and the credit crunch.
While some analysts believe that the ECB will be in no rush to change rates, other analysts say slowing economic growth and signs that inflation has peaked will end up forcing the Frankfurt-based bank to cut the cost of money by the middle of the year.
The economic mood in the eurozone darkened in August, a key survey released last month showed. At the same time, the recent slide in oil prices resulted in a bigger-than-forecast drop in inflation in the 15- member currency bloc.
Data released while the ECB's governing council was deliberating showed industrial order books in Germany, Europe's biggest economy, posting their eighth consecutive fall in July to drop by 1.7 per cent. Analysts had forecast a modest 0.4-per-cent rise.
The European statistics office said last week annual inflation in the eurozone dropping more than expected to 3.8 per cent in August from a record 4.0 per cent in July indicating that consumer prices in the currency bloc might have peaked.
At the same time, oil prices have continued to pull back from recent record highs of around 150 dollars a barrel to drop below 110 dollars.
Nevertheless, inflation in the eurozone still remains at almost double the ECB's annual inflation target of close to but under 2 per cent.
