ECB holds the line on rates, hints at move in July

The European Central Bank (ECB) kept its benchmark rate at 1.25% following a quarter point bump in April, the first such tightening in over two years.

ECB President Jean-Claude Trichet said he continues “to see upward pressure on overall inflation, mainly owing to energy and commodity prices,” and will continue to “closely monitor” upside risks to price stability.

However, Trichet refrained from using the key signal “strong vigilance,” which would have strongly implied a rate hike at the June meeting.

Unlike the Federal Reserve, which has a dual mandate that focuses on price stability and unemployment, the ECB has a single mandate that focuses only on inflation.

That does not mean that the ECB operates in a vacuum, automatically hiking rates when inflation moves above its target of “close to, but below 2%,” but it does set off alarm bells among central bankers, as they ramp up the hawkish rhetoric.

The lack of a concrete signal for a June rate increase is helping to lift the dollar against the euro.

Additionally, the caution the ECB is displaying is effectively telegraphing to the financial markets that the bank is concerned about economic conditions and fears that a more aggressive path, which would likely strengthen the euro, could further complicate the situation in southern Europe.