Due vigilance?

The Governing Council of the European Central Bank (ECB) convenes on Thursday to reassess the bank's interest rate.

On August 2, ECB President Jean-Claude Trichet strongly suggested that the main interest rate would rise by a quarter percentage point to 4.25% in September, saying that inflation needed to be monitored with "strong vigilance". His repeated references to 'vigilance' throughout the year are now a barely disguised code for another quarter of a percentage point rise. But recent turbulence on the financial markets caused by the US subprime mortgage crisis -- which forced the ECB to inject more than 2 billion euros into European money markets -- has increased speculation that the bank might reconsider its position. 

Leading economists and bankers are calling for a rate freeze to avoid a financial meltdown, while economic figures, released earlier this month, indicate that economic growth is slowing in the euro-area, while inflation is falling. Yet, the strongest hint of a change in the banks 18-months rate-tightening cycle came from Governing Council members themselves.  Trichet stressed on several occasions that he was "not pre-committed" to a rate rise, while Axel Weber, Bundesbank president and one of the most hawkish council members, refrained from uttering the "strong vigilance" codeword.  The decision will largely depend on the behaviour of financial markets over the coming days but an interest rate freeze is more likely than a hike.