ECONOMY

ECB under pressure on rate hikes

BERLIN – European Central Bank President Jean-Claude Trichet faced renewed political pressure yesterday to steer clear of hasty interest rate rises, which lawmakers fear could stifle the eurozone’s economic revival. The 12-nation region grew at its fastest rate in six years in the second quarter and the ECB has left little doubt it plans to raise interest rates again in early October, probably taking benchmark credit costs to their highest since late 2002. But many economists think eurozone growth has already peaked and will slow further next year, and German Finance Minister Peer Steinbrueck yesterday joined counterparts from France and Austria in urging the ECB to proceed with caution. «The economy is gaining momentum or, to stay with the football analogy, the game is just getting going,» Steinbrueck said in a speech at a ceremony to award the German-French culture prize to ECB President Jean-Claude Trichet. «Now the referee will play a decisive part – if he makes a mistake (behaves too restrictively) and needlessly shows a red card, he risks demotivating the players and lowers the level of the game,» he said. «Good monetary policy is, like good football, an art.» Trichet did not respond to the plea. Arriving at the ceremony, the Frenchman brushed off journalists’ requests to answer questions on monetary policy, saying, «Last week’s press conference was very clear.» The ECB last week held its key rate at 3 percent but Trichet said at a news conference that «strong vigilance» was needed, cementing market expectations credit costs will rise again in October. Politicians appeared resigned to interest rate rises in the first half of 2006 as the ECB tightened credit costs at a gradual pace of 25 basis points every three months, after fretting about the end of more than two years of record cheap money in late 2005. However, the ECB has accelerated the pace since then. It left just two months between hikes in June and early August and economists generally expect two more quick-fire increases to 3.5 percent by year’s end, even as economic indicators turn mixed. A jump in eurozone producer prices reinforces the ECB’s concerns about increased risks to inflation, which the Central Bank expects to come in above its 2 percent ceiling in 2007 for the eighth year in a row. Producer prices rose at an annual rate of 5.9 percent in July and, excluding energy, the index was at its highest level in more than 10 years. But the eurozone Purchasing Managers Index showed both the prices paid by manufacturers and the prices they charged customers retreated in August, as overall activity eased for the second month running. The slip followed a decline in the August German Ifo business confidence survey and its Belgian counterpart, seen as a litmus test for the rest of the eurozone. Slower economic growth lessens the chance of high energy prices being passed on in wage demands and consumer prices. Eurozone finance ministers and central bankers are due to meet for informal talks next weekend in Finland and the upward march of credit costs rates may come up in discussions. Asked last week about concerns that rate policy could harm growth, French Finance Minister Thierry Breton repeated the phrasing the ECB has used to signal concern about inflation. «We are very vigilant about rates, clearly, and the ministers in the Eurogroup discuss them when we meet every month,» Breton said. «We speak about them among ourselves and with the president of the European Central Bank.» Also speaking shortly before Trichet’s Thursday news conference, Austrian Finance Minister Karl-Heinz Grasser said he hoped the ECB would «show responsibility in ensuring the highest possible growth in Europe.» The European Central Bank says that the best contribution it can make to sustainable growth and job creation is to keep inflation low, calling on governments to step up structural reforms.