ECB likely on hold for the near term

With relatively tame inflation data emerging from the Euro zone, analysts say a tightening by the European Central Bank (ECB) is not in the cards any time soon. While in late 2004, some analysts had expected a tightening sooner, rather than later, expectations are being pushed back as some market watchers now project that the repo rate may be on hold throughout 2005.

At the latest meeting on March 3, the ECB matched the market’s expectations with a steady monetary policy response.

The bank’s repo rate remains at a six decade low of 2.00 percent, well below the U.S. federal funds rate of 2.75 percent (as of March 22), the Bank of England’s 4.75 percent rate and the Reserve Bank of Australia’s 5.50 percent. This all adds up to continuing negative interest rate differentials for the Euro in the months ahead.

“They have zero ‘real’ short-term interest rates,” notes Sean Callow, currency strategist at Ideaglobal. “If you earn the 2.00 percent repo rate in the Euro zone, you lose the whole thing within the year to inflation.”

The ECB is set to meet next on April 7, but analysts don’t expect action out of that meeting either.