FRANKFURT (AFP) — The European Central Bank kept its main interest rates on hold Thursday against a background of rising inflation and slowing growth, shortly after the Bank of England (BoE) did the same.
At a press conference after the decision, ECB president Jean-Claude Trichet warned emphatically that raising prices and wages in response to spikes in the cost of energy and food could generate "second round" inflation that the bank would not tolerate.
The ECB was "prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise," he stated, a clear warning it could raise interest rates in the future despite slumping economic activity.
Trichet stressed that those making price and wage decisions this year, including labour leaders, bosses and governments must act responsibly, saying that he and the ECB governing council "call upon them to behave properly, if I may."
The benchmark borrowing rate for the now 15-nation single currency zone remained at 4.0 percent as the ECB measured twin threats posed by the price spikes and a banking crisis that followed the collapse of the US subprime home loan market in early August.
Of the two issues, inflation was clearly a greater concern to ECB policy makers in Frankfurt, among whom figured for the first time central bank governors from the Mediterranean islands of Cyprus and Malta, which adopted the euro on January 1.
An ECB statement read by Trichet also reiterated that "the risks surrounding the outlook for economic activity are on the downside."
In Britain meanwhile, the BoE held its main interest rate at 5.50 percent after cutting it in December for the first time in more than two years.
The ECB also held its two other key rates -- the deposit rate and the marginal lending rate -- unchanged at 3.00 percent and 5.00 percent respectively.
The tone of Trichet's press conference was clearly "hawkish," with the ECB chief acknowledging at one point that an interest rate cut was not even considered at the bank's governing council meeting.
He hammered home the threat that further increases in prices and wages would prompt the bank to act, amid growing calls for wage hikes to help households deal with inflation that hit 3.1 percent in November and December.
Eurozone inflation would remain "significantly" above the bank's medium term target of 2.0 percent in the coming months, and would only moderate gradually during the year, Trichet said.
"It is imperative that all parties concerned meet their responsibilities and that second-round effects on wage and price-setting stemming from current inflation rates be avoided," he added.
"This is absolutely essential in order to preserve price stability in the medium run, and thereby the purchasing power of all euro area citizens."
The ECB decides monetary policy for a region of 320 million people that accounts for about 15 percent of global gross domestic product (GDP).
ECB policy has diverged from that of the US Federal Reserve, which has sharply lowered the cost of borrowing because of the US housing crisis and subsequent banking sector turmoil.
The Fed is widely expected to cut again at its next meeting on January 30 after lowering its benchmark rate to 4.25 percent at the end of last year to help stimulate the slowing US economy.
"Is the Atlantic Ocean getting wider," Bank of America senior European economist Holger Schmieding wondered following the decision.
He noted also that "on the very day in which negotiations started in Germany about an eight percent wage demand for civil servants, Trichet explicitly mentioned the public sector wages in his warnings about second-round effects."
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