The European Central Bank kept interest rates at 1 per cent as forecast today, ahead of its policy statement where it is expected to repeat its recent inflation warning but signal that a rate rise is not imminent.
This is the 21st month running that the bank has left the rate unchanged.
The euro and bond markets did not react to the heavily expected decision.
It leaves focus firmly on news conference with ECB president Jean-Claude Trichet this afternoon where the bank's message on the ongoing build-up of euro zone inflation pressures will shape financial markets' view on the timing of ECB future rate hikes.
"Rates unchanged is in line with expectations but the key is really Trichet's tone in the press conference and what may be alluded to in terms of monetary policy and liquidity support in the months ahead," said Deutsche Bank economist Mark Wall.
"Markets were surprised last month by the inflation talk from Trichet, it wasn't a signal of policy action and we would expect him to maintain that message in this month's press conference."
Inflation in the common currency area has been above the ECB's price stability target of below, but close to 2 per cent for the past two months and stood at 2.4 per cent in January.
Producer prices rose more than expected in December, boosted mainly by a jump in energy costs, pointing to rising inflationary pressures in the pipeline, and signs of surging inflation corresponded with the strong performance of service sector firms in the euro zone during January.
Last month, the ECB toughened its language on inflation dangers, saying "very close monitoring of price developments is warranted," and that price risks, while still broadly balanced, could move to the upside.
The sharpened tone saw financial markets bring forward rate hike expectations. Nevertheless, analysts believe the language shift was more about communicating its commitment than preparing markets for a hike soon.
"They are moving up the rhetoric to keep inflation expectations at bay and to avoid seeing them drift higher," Unicredit economist Marco Valli said. "By barking now, the ECB can afford to act later on rates."
An important clue to how well the 17-country currency area's central bank has succeeded in anchoring inflation expectations is the Survey of Professional Forecasters.
Mr Trichet will likely face questions about the survey, even though it will officially be published next week. A rise in inflation expectations to above the central bank's target would increase pressure for it to act.
Financial markets started moving forward their rate hike expectations after the January meeting. Markets now see a chance of a first rate increase coming during the summer, and recent days have seen more price threats gathering.
Reuters
