Interest rate on hold but possibly not for long

The cost of borrowing is expected to rise again soon after the European Central Bank hinted at a new revision of interest rates in July.

The bank yesterday decided to keep unchanged the 1.25 per cent rate but, clearly indicating an imminent increase, ECB President Jean-Claude Trichet said “strong vigilance” was needed because of the “upward pressure on inflation” from high energy and commodity prices.

Mr Trichet said the bank would act “in a firm and timely manner” to prevent price developments from leading to further inflationary pressures. But he said the ECB had not made a decision to change its rates in the near future and would base any decision on available data.

“We decide when it is necessary to anchor inflation expectations. We are not signalling any particular pace for the next decision on our interest rates,” he said.

The latest EU economic data showed growth in the eurozone of 0.8 per cent in the first quarter of 2011. Growth in the last quarter of 2010 was 0.3 per cent.

Annual growth in the eurozone is estimated to be between 1.5 and 2.3 per cent this year and 0.6 to 2.8 per cent in 2012.

Inflation is expected to be between 2.5 to 2.7 per cent this year and 1.1 to 2.3 per cent in 2012.

Malta’s economy is expected to perform better than the eurozone’s average but inflation is also expected to be higher.

July’s expected rise in interest rates is expected to be the second one this year after a three year period which saw rates at the lowest level ever since the introduction of the euro.

In April the ECB raised its reference interest rates from 1 to 1.25 per cent.