ECB hints at further rate hike

PARIS/TUEBINGEN – European Central Bank President Jean-Claude Trichet said interest rates are still low despite two rate hikes and that the ECB will do everything needed to keep inflation under control. The central bank pushed home its determination to head off price pressures in a series of interviews with policymakers published on Tuesday, helping seal investor expectations that the ECB is poised to tighten credit again in coming months. In an interview with five European newspapers, Trichet said signs are encouraging for economic growth, but he repeated that the ECB had not decided ahead of time on a series of interest rate rises. «Our monetary policy is accommodating,» Trichet said, according to an copy of the interview released by French newspaper La Tribune. «We have real short-term interest rates that are very close to zero, nominal short-term interest rates are the lowest in the euro area since the Second World War.» «There is abundant liquidity,» he added, noting that money supply was growing at twice the pace of economic output. Markets and investors generally expect the central bank to raise rates twice more to 3 percent by the end of the year, from the 2.5 percent level set earlier this month. Rate rise expectations helped push the euro to $1.2027 against the dollar, its highest level in a week, driven partly by Bundesbank President Axel Weber who had declined to say whether he considered rates were appropriate – often a hint of a pending hike for the 12-nation eurozone. Weber told journalists in the German city of Tuebingen that rates were still low and no hindrance to growth, while risks to prices were on the upside. «I have repeated that we definitely see risks to price stability. We will use our monetary policy to react appropriately to risks to price stability,» he said. In the newspaper interview, published in Germany, Belgium and Austria as well as France, Trichet stressed the central bank’s determination to keep inflation under control. There were so far no indications of oil price rises feeding into consumer prices and wages, but once such effects showed up it was too late, he said. «All observers have understood that we will do everything that is necessary to maintain price stability,» he said. Weber said he expected an increase in the underlying inflation rate in the near future, a possible sign of second-round effects, and predicted the gap between headline and core inflation would close. Growth looking up In February headline inflation was 2.3 percent, above the central bank’s 2 percent price stability ceiling, while core inflation has been about 1.3 percent, causing some economists to argue the ECB should hold off with rate rises. European trade unions and business leaders also renewed their plea this week for ECB moderation in its rate tightening, warning that it risks upending a fragile recovery. But Trichet made clear the ECB would not be swayed from its price stability course. «The ECB is totally and fiercely independent,» he said when asked about political opposition to rate rises. On the economic outlook, Trichet said it bears careful watching but welcomed recent positive data from Germany, the eurozone’s largest economy. «We will see how the present period of recovery develops, we have quite a number of good signals. These signals are encouraging for the euro area and confirm a trend for the recovery that is likely to be around our growth potential.» Manufacturing activity and exports are strong, confidence surveys robust and consumer demand showing signs of a pickup. While data released on Tuesday were mixed – the German ZEW sentiment indicator eased as did inflation in Spain and France – analysts said the numbers did nothing to undermine the scenario of a gradual pickup. Weber brushed off the dip in German investor sentiment and said he still expected «a broadening, moderate, recovery.» This cautious optimism was echoed by fellow Governing Council members John Hurley of Ireland and Belgium’s Guy Quaden. «All the indications are good,» Hurley told news agency Bloomberg. «We’ve seen some improvement in investment, and there’s also improvement in the labor market. That’s good news.» Quaden was quoted in the same report as saying prospects for growth «will remain good.» Asked if the ECB was still vigilant – a word the ECB has used in the past before raising rates – he said, «Absolutely.» Hurley, like Trichet, said the ECB was not set on a steady credit tightening path similar to the US Federal Reserve. «Our future decisions are not predetermined,» Hurley said. «Once the Governing Council settles on an increase in interest rates, it’s clearly satisfied at that time that the increase is dealing with the risks as it has assessed it,» Hurley said. «What we do now is to assess the data.»