ECB may hike rate to 4.25% today
European Central Bank (ECB) President Jean-Claude Trichet, who is expected to raise interest rates on Thursday, said there’s a risk of inflation “exploding” if central banks don’t act decisively.
By Bloomberg |
FRANKFURT: European Central Bank (ECB) President Jean-Claude Trichet, who is expected to raise interest rates on Thursday, said there���s a risk of inflation ���exploding��� if central banks don���t act decisively.
���We central banks have a big responsibility,��� Mr Trichet told Germany���s Die Zeit newspaper. ���If we���re not decisive, there���s a risk of inflation exploding. If we act in a decisive way, we can master the situation.��� The ECB confirmed the comments.
Mr Trichet on June 5 said the bank may raise its key rate by a quarter-point to 4.25% at its July 3 meeting to contain inflation even as economic growth slows. Since then, soaring food and energy prices pushed euro-area inflation to 4%, twice the ECB���s limit.
Policymakers are concerned that workers will demand wage increases to compensate for the higher cost of living, entrenching faster inflation.
���Mr Trichet���s comments reflect the ECB���s position that it will counter any wage-inflation spiral emanating from current inflation rates,��� said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ���The ECB���s thinking is that even though higher rates may hurt growth in the short term, the longer-term economic fallout would be much worse if it doesn���t act now.���
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The euro and yields on Eonia forward contracts rose after Mr Trichet���s remarks were published, as investors raised bets on higher ECB interest rates. They expect the ECB to increase its key rate to 4.5% by December, and some expect a further move by March, the contracts show. Adding to the ECB���s concerns, European producer prices jumped a record 7.1% in May from a year earlier, the European Union statistics office in Luxembourg said on Wednesday.
Still, politicians are concerned that higher interest rates will deepen Europe���s economic downturn. European companies are grappling with the euro���s 16% appreciation against the dollar in the past year, which makes their exports less competitive, and record oil prices above $140 a barrel, which are sapping purchasing power.
Manufacturing and services industries contracted in June. French President Nicolas Sarkozy told France 3 television on Tuesday that the ECB ���should ask itself the question about economic growth in Europe and not only inflation���.
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France stepped up its campaign on Tuesday, with an official saying a rate increase would put growth at risk without reducing inflation or the oil price. German finance minister Peer Steinbrueck said on Wedenesday the ECB should consider the effects on economic growth of an increase in rates. Inflation itself will damp economic growth, he said.Download
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