Market expectations of an ECB rate hike in March ‘reasonable’

Eurozone inflation risks have risen since December’s interest rate hike and the European Central Bank will move quickly to head off any threats to price stability, said Garganas, who is also a European Central Bank (ECB) Council Member. «In the period following the increase in interest rates in December, risks that could strengthen inflationary pressures have risen,» he said in his Thessaloniki speech. Echoing ECB President Jean-Claude Trichet, he said market expectations for a rate rise in March – probably a quarter-point one, taking the benchmark rate to 2.5 percent – were reasonable. «The Governing Council will intervene promptly and in a way that is required to ensure that any possible inflationary pressures will be contained and that inflation expectations will stay anchored at levels compatible with price stability,» he said. Inflation was running at 2.4 percent in January, well above the ECB’s reference rate, but a sluggish economy may put off further rate rises. Economic growth in the 12-nation eurozone was disappointing in the fourth quarter of 2005, at 0.3 percent quarter on quarter, while growth in the largest economy of Germany ground to a halt. But Garganas brushed off the figures and sounded upbeat that the recovery in the eurozone’s economy would continue. «Economic activity has begun to improve and it appears that this process is continuing, after, of course, taking into account the usual rate of volatility of quarterly GDP growth rates,» he said. Faster economic growth carries with it the risk of faster price rises and Garganas said the ECB had adopted a stance of vigilance on price risks similar to the one it adopted before December’s hike. These risks mainly hinged on a possible further rise in oil prices which could be passed on to consumer prices and wages, he said. «These risks have to do with a possible further rise in oil prices, a larger-than-currently-expected passing on of this oil price increase to consumer prices, additional rises in administratively set prices and indirect taxes in the eurozone,» Garganas said. (Reuters)

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