ECB Leaves Rates On Hold As Inflation Simmers

BERLIN (AP) - Inflationary pressures in the 17-nation eurozone remain in check despite a spike in prices on the back of higher energy and commodity costs, the European Central Bank's president said Thursday - an assessment that was less hawkish than many expected and prompted the euro to fall sharply.

Jean-Claude Trichet's comments came after the bank's governing council decided unanimously to leave its main interest rate unchanged at 1 percent for the 21st consecutive month.

That decision was expected. What was a bit of a surprise was Trichet's failure to toughen up his language.

All Trichet really did was reiterate his language from last month, that "very close monitoring" of inflation was "warranted" - a formulation that at the ECB's last meeting in January raised speculation that the central bank may be eyeing a move on rates in the coming months.

Overall, he declared that "inflationary pressures over the medium to long term should remain contained" even though the headline rate would likely stay above target over much of 2011.

Consumer prices in the 17-nation eurozone spiked up to a 27-month high of 2.4 percent in the year to January, up from December's 2.2 percent gain. The increase meant that inflation was further away from target - the ECB's mandate is to keep inflation close to, but below 2 percent.

The euro, which was bolstered by Trichet's comments in January, dropped when he failed to toughen his talk on Thursday. The currency was down 1.1 percent on the day at $1.3650; when Trichet took to the stage, it was trading around $1.3730.

"Trichet's remarks proved more dovish than the market was expecting," said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon. "Trichet and the ECB governing council are inching towards a rate hike later this year, but at a slower pace than the market expected."

The news earlier this week that inflation was running further ahead of the ECB's target had ratcheted up expectations that Trichet would sound more hawkish and that a rate hike in the next few months was a distinct possibility.

Further complicating matters is the unrest in Egypt, which has stoked fears of even higher oil prices. Trichet offered no assessment of the possible impact on inflation, though he said that the ECB is following events "with great attention."

Rising prices in the eurozone come at a time of increasing global concern about inflation, which hit 3.7 percent in Britain in December, while China is expected to raise interest rates this month to cool its overheating economy.

"Do not expect any imminent ECB policy action," said ING economist Carsten Brzeski. "For the time being, the ECB will stay in its current wait-and-see mode, even if it clearly sits less comfortably there than last year."

One reason why the ECB may be reluctant to raise interest rates anytime soon is the uncertain pace of the economic recovery in the eurozone this year.

Though noting the "positive underlying momentum" in the eurozone, Trichet said the "risks to this economic outlook are still slightly tilted to the downside while uncertainty remains elevated."

The eurozone debt crisis also is still simmering in the background despite a recent respite, and a rate hike soon would be unhelpful to struggling countries such as Greece, Ireland and Portugal.

The ECB's steps during the crisis included extra loans to banks and buying up the bonds of financially troubled countries.

Trichet said that "the money markets seem to give signs of better functioning" but didn't signpost when those measures might be wound down.

He noted that some markets still aren't functioning normally and said only that the bond-buying program is "ongoing."