ECB maintains cautious stance

The European Central Bank (ECB) held interest rates at 1.25% on Thursday, remaining in line with most analysts’ expectations. In his subsequent press conference, ECB president Jean-Claude Trichet, had hinted the bank is not planning to increase the refinance rate next month, saying only that it will “monitor very closely” all inflationary developments in the meantime.

Also in the eurozone, the International Monetary Fund (IMF), the EU and the ECB announced the memorandum of understanding containing details on the Portuguese financial support package.

The package amounts to a total of €78 billion, of which two-thirds (€52bn) are to be provided by the EU and one-third (€26bn) by the IMF.

Meanwhile, retail sales in the 17-nation euro area fell sharply in March, indicating that food and energy prices were reigning in household spending and that the economic recovery is still mainly industry-driven. Sales fell by 1% in March, much lower than the 0.1% decline expected by market players.

As expected, the Bank of England also left interest rates on hold at the latest Monetary Policy Committee meeting. The committee failed to issue a statement following the decision and the vote split will not be released for two weeks.

Following recent weaker-than-expected economic data, there was a further scaling back of interest rate expectations by most UK economists. Meanwhile, the Purchasing Managers Index for UK manufacturing fell to 54.6 for April from a revised 56.7 the previous month. This represented a seven-month low for the index.

In the US, factory activity eased to 60.4 in April from 61.2 the previous month, slightly higher than economists’ expectations, while manufacturing costs rose to the highest level in nearly three years.

All major sub-indices marginally retreated but remained above 60. While the decline in the new orders’ component and the growth in inventory investment to 53.6 from 47.4 both potentially point to a slower expansion of manufacturing production in the future, the backlog of orders also increased from 52.5 to 61.0, possibly boosting future production.

This article was compiled by Bank of Valletta plc for general information purposes only.