ECB keeps rates steady, buys time as oil rises

The European Central Bank kept interest rates steady at 2 per cent today, deciding to to take more time for assessing any damage…

The European Central Bank kept interest rates steady at 2 per cent today, deciding to to take more time for assessing any damage that rising oil prices inflict on the euro zone economy. Markets were unchanged after the widely expected decision.

The focus now turns to ECB President Jean-Claude Trichet's first news conference on monetary policy in two months this afternoon, when he is expected to strike a slightly more hawkish tone.

The euro zone economy has sent mixed signals recently. The manufacturing sector weakened slightly in August, new data showed today but employment has improved and growing business and consumer confidence have quietened calls for a rate cut.

"I would not be surprised if Trichet's tone is rather more hawkish. But I say tone, not action, because I believe the ECB is still some way from changing its policy stance," said UBS economist Holger Fahrinkrug.

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The ECB has held rates at 2 per cent since June 2003, and most economists expect no increase until the second quarter of 2006.

Mr Trichet will also release updated growth and inflation forecasts from the ECB's economists, who are expected to raise their previous prediction for 2006 inflation of around 2 per cent. However, the new staff forecasts are unlikely to alter the overall picture of slow return to a normal pace of growth.