ECB poised for further rate hikes

FRANKFURT/LISBON – European Central Bank (ECB) policymakers brushed off concerns yesterday that a global slowdown will dent robust eurozone growth, in comments that firmed prospects for further interest rate increases. Eurozone rates must rise given stubbornly high inflation in the 12-nation region, Governing Council member Nicholas Garganas said in an interview. Garganas told news agency Bloomberg the ECB was «very worried» that inflation was no longer expected to ease in 2007, backing signals from other policymakers that interest rates may keep rising next year if price pressures do not ebb. «There is still a considerable amount or degree of monetary accommodation which needs to be withdrawn,» Garganas said. Both Garganas and fellow ECB Governing Council member Vitor Constancio played down the prospect of a bigger-than-expected downturn in the eurozone’s trading partners in 2007, which many economists see as a risk to growth. «The consensus view at the moment is that the slower (global) growth will be very slight and will have beneficial effects over the evolution of global and economic imbalances,» Constancio said at a meeting of central bankers from Portuguese-speaking nations. Garganas said there were doubts about the possible future course of the US economy, but this should be compensated for by stronger growth in Asia and some European economies. Speaking in Lisbon, Constancio said future moves would depend on hard data, although he said the process of bringing credit costs to a more normal level had not hampered growth. «I think what is essential is that monetary policy continues vigilant but be dependent on concrete European economic data and the analysis of the present risks within the actual conjuncture,» Constancio said in a speech. «We should not speculate on the basis of hypothetical scenarios for the near future since there is no pre-commitment with a precise trajectory regarding the evolution of interest rates.» The ECB held rates at 3.0 percent at its last meeting but is expected to tighten them again in October. Bond futures fell to a three-week low after Garganas’s comments, as markets increased bets on the prospect of rates rising past 3.5 percent. «The market has already fully priced in October and December hikes. In my view, recent remarks by ECB officials, including those of Garganas today, remind the market that they don’t have to stop so soon. It all depends on data,» said Wee-Khoon Chong, trading strategist at Bank of America in London. Underlining the ECB’s determination, ECB Executive Board member Gertrude Tumpel-Gugerell said eurozone financing costs remained favorable and Bundesbank board member Hans Reckers said the ECB was keeping a close eye on inflation expectations. «If inflation expectations become entrenched at over 2 percent, the ECB has to act,» Reckers told Bloomberg TV. Asked if that included next year, he said, «Yes.» Garganas said better growth in the eurozone could squeeze inflation higher this year and next. ECB staff last month raised inflation and growth projections and now see inflation in a range of 2.3-2.5 percent in 2006 and 1.9-2.9 percent in 2007. «In the light of the narrowing output gap, I would not be surprised to see inflation in the upper part of those ranges,» he said. The mid-point for the staff inflation forecasts in 2006 and 2007 is 2.4 percent and if inflation does come in above 2 percent in 2007, the ECB will have missed its price stability goal for the eighth year in a row. Growth, which ECB staff forecast at 2.2-2.8 percent in 2006 and 1.6-2.6 percent in 2007, may also turn out «somewhat higher than projected at the moment,» Garganas said. Euribor interest rate futures fell to two-year lows yesterday, as the hawkish comments from ECB policymakers deflated bond bulls already drowning in a slew of bond issuance. December and March 2007 Euribor contracts fell to their lowest levels since mid-2004. «I think they are sort of desperate to hike rates because they have probably missed the opportunity to do it before,» said Alessandro Tentori, bond strategist at BNP Paribas. «Also they are being quite hawkish because the hard data and the sentiment data are going down a little bit on the prospect of a US slowdown and for this reason they had to speed up the pace or else risk that once the slowdown is there, there will be no room anymore for rate hikes.» The December Euribor contract hit a two-year low at 96.265, while the March 2007 Euribor contract also fell to its lowest since mid-2004 at 96.130.