The European Central Bank left interest rates unchanged today, playing down fears of a stumbling economic recovery and expressing confidence that inflation will gradually fall despite soaring oil prices.
But ECB President Jean-Claude Trichet stressed the bank maintained its 'strong vigilance' on the threat to price stability in the medium term, and analysts said an anticipated softening of his recent hawkish tone had not materialised.
'As regards economic growth, while some uncertainty has recently arisen concerning the expected strengthening of activity, the economic recovery in the euro area is ongoing,' ECB President Jean-Claude Trichet told a news conference after the bank's meeting.
'Looking at price developments, high oil prices have had visible direct impact on the inflation rate this year,' said Trichet, reading a statement issued by the ECB's Governing Council after its meeting in Brussels today.
But he said that so far, high oil prices had not encouraged workers to demand higher pay increases and companies to raise their prices - what the ECB calls 'second round effects'.
'The risk of second round effects still seems to be contained,' he said. 'The overall outlook remains consistent with price stability over the medium term'.
As oil prices hit new records above $52 a barrel, fresh economic data show the shine already is coming off growth.
The euro zone jobless rate edged up and retail sales and German export orders fell in August, while indices tracking the manufacturing and service sectors slipped in September.
Accordingly, the ECB Governing Council decided to leave its official interest rate at a record low of 2% for the 16th month in a row. Separately, the Bank of England also held its benchmark rate at 4.75%.
The ECB Governing Council's policy statement showed little sign of a slight softening of its strident anti-inflation rhetoric over the past month when it warned very cheap money and costly oil merit strong vigilance.
'Strong vigilance is warranted with regards to all developments which would imply risks to price stability over the medium term,' the ECB chief said.