Jean-Claude Trichet, the ECB's president, set off sharp moves in currency and credit markets on Thursday as he sought to play down expectations of rate rises over coming months.
Mr Trichet said the jump in eurozone inflation to 2.4pc is a "short-term" effect of rising energy and commodity costs. "Our monetary analysis indicates that inflationary pressures over the medium to long term should remain contained. Inflation expectations remain firmly anchored At the same time, very close monitoring is warranted," he said. The ECB held rates at 1pc.
The euro tumbled almost two cents to $1.362 against the dollar, giving up a quarter of the gains it has made since Mr Trichet set off tremors last month with a red-hot inflation alert. Yields on the benchmark German Schatz or two-year bond plummeted 14 points to 1.34pc.
David Owen from Jefferies Fixed Income said Mr Trichet had carried out a deft pirouette. "Markets had priced in two rates this year after his comments in January, so he is now trying to put those expectations back in the box," he said.
Mr Owen said the ECB had learned a hard lesson when it over-reacted to the oil spike in the summer of 2008 by raising rates, even though Germany and Italy were already in recession by then and the global credit system was already starting to crumble.
"That was a major policy mistake. This time they are making the right judgment because there is no sign of credit growth in the eurozone, and the M2 money supply has started to contract again. The ECB must also be worried about the scale of deposit outflows from the Irish banking system," he said.
The ECB decision to "look through" the commodity spike brings the bank closer into line with the Bank of England and the US Federal Reserve, which has kept its focus on core inflation measures that strip out food and energy.
Yet is a risky move at a time when a powerful new cycle of global growth may be under way and the whole nexus of commodities is on fire. March contracts for Brent crude oil jumped to a two-year high of $103 a barrel on Thursday, while copper broke through $10,000 a tonne and cotton reached the highest price since the US Confederacy halted exports during the Civil War in the 1860s.
The UN's Food and Agriculture Organization (FAO) said its index of global food prices had hit a fresh record in January, while Goldman Sachs's farm index has risen 90pc since June.
Abdolreza Abbassian, the FAO's grain expert, said there is no sign yet that the "upward pressure" on world food prices is abating. "These high prices are likely to persist in the months to come," he said.
The uprisings in Tunisia and Egypt leave no doubt that the food shock has become a threat to social stability in much of the Middle East and possibly Asia. Food prices make up 50pc of the inflation index in the Philippines, and 37pc in China. It is less clear what the commodity shock means for the richer Atlantic world.
The current situation is unprecedented since excess global liquidity is flowing to the overheating economies of China, India, Brazil and the emerging powers, while parts of the West remain stuck in a "liquidity trap" with sluggish growth.
It is hard for Western central banks to calibrate policy in this new world order since their economies are no longer the driving force in commodity markets, unlike the 1970s when it was their own excess stimulus that set off the commodity spiral.
Rising resource prices in today's radically changed circumstances act as a tithe on US and European consumers and industry that must be paid to Mid-East petro-powers or Russian metal barons. This can have a deflationary impact, implying that moves to counter the effect by raising rates would make matters worse.
Germany's booming export sector has helped revive the eurozone over recent months but the Bundesbank forecasts a sharp slowdown in German growth this year, while the IMF expects fiscal tightening to delay recovery in Spain, Greece, Portugal and Ireland until 2012.
Eurozone retail sales have fallen for two months in a row, dropping 0.6pc in December. "Risks to the economic outlook are still slightly tilted to the downside," said Mr Trichet.
Veteran ECB watchers cautioned against reading too much into Mr Trichet's apparent retreat on inflation. Ken Wattret from BNP Paribas said there was a coded warning in the ECB's statement about upward pressure on prices in the "earlier stages of the production process", a precursor to inflation.
The German-led hawks at the ECB have not capitulated yet.
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