The European Central Bank announced this morning that it would hold interest rates at 1.5%, a likely indication that the policy tightening cycle it began back in April is now on hold as the European economic recovery has cooled.
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The ECB first increased interest rates in April, then again in July, and looked set to do so at the beginning of each quarter as the economic recovery continued, but as Italy (NYSE:EWI) and Spain (NYSE:EWP) enter the fray and the ECB begins buying Italian and Spanish bonds, economists are now prediction it could reverse interest rates, cutting them as soon as December.
ECB President Jean-Claude Trichet is set to speak this morning in order to explain the Governing Council’s decision. Trichet is unlikely to announce any cuts in the near future, as he will be up for re-election next month and won’t want to signal that his rate hike plan wasn’t working. However, with year-on-year inflation at 2.5%, well above the ECB’s target of just under 2%, a rate cut might be necessary in the near future.