European Central Bank Keeps Interest Rate Unchanged At 1.25%

The European Central Bank just keeps the key interest rate at 1.25%, in-line with expectation.  Just as Jean-Claude Trichet suggested, the rate hike last month wasn’t the start of a series of rate hikes.  As a reminder, the ECB raised interest rate by 25 basis points last month as inflation risk increases.

For the ECB, the key concern is, of course, inflation, as price stability is their only mandate.  The flash estimate of inflation in the Euro area rose to 2.8%, so inflation is rising in the Europe as a whole.  However, I have repeatedly stressed that parts of the Eurozone countries have significantly lower inflation (or even still under threat of deflation), while some peripheral countries with debt crisis have high inflation. 

To me, that’s just another manifestation of the absurdity of Euro area.  It is as absurd as the gold standard, which encouraged inflow of gold into the United States in the run-up of the Great Depression.  Going forward, inflation will still be a great concern for the European Central Bank, and the market was expecting two more rate hikes for the year.  That will be bad for the peripheral countries.