ECB may keep rate options open as investors look for signal
European Central Bank president Jean-Claude Trichet may buy time on Monday as he seeks to thaw a credit-market freeze without surrendering a two-year fight against inflation.
By Agencies |
PARIS: European Central Bank president Jean-Claude Trichet may buy time on Monday as he seeks to thaw a credit-market freeze without surrendering a two-year fight against inflation.
In his first speech since the financial-market rout began, Trichet may disappoint investors wanting a clear signal whether he will raise interest rates on September 6. He may instead keep his options open, pledging liquidity to the banking system without closing the door on an increase. He speaks at 3 pm in Budapest.
“The ECB is far from decided,” said Michael Hume, chief European economist at Lehman Brothers Holdings in London. Trichet’s speech “seems too soon to clarify matters.”
A week ago, investors bet that the global contraction in credit would prevent the ECB lifting its benchmark rate from 4%. That view is now in doubt after the ECB on August 22 loaned an additional 40 billion euros to banks and said it was sticking to the policy stance expressed by Trichet on August 2. Then, he promised ‘strong vigilance,’ a phrase used to foreshadow each of the eight rate increases since 2005.
Investors reacted by reviving their wagers that the ECB will boost borrowing costs by a quarter point in September. The implied rate on the September interest-rate futures contract rose to 4.57% last week from 4.34% on August 10. At the same time, some economists have scrapped their forecasts for further ECB tightening.
“Additional tightening from the ECB now risks exacerbating the current crisis and could prompt an even sharper slowdown,” said James Nixon, an economist at Societe Generale in London who used to work as a forecaster at the ECB. “We now expect the ECB to hold rates at 4% until at least the spring of next year.”
There is evidence that the fallout from the collapse in the American market for subprime mortgages is hurting Europe.
BNP Paribas, France’s biggest bank, was forced to halt withdrawals from three of its investment funds, while Landesbank Sachsen Girozentrale, the German state-owned bank, is getting emergency funding.
UBS, Europe’s largest lender, said August 14 profit may decline for the rest of the year because of turmoil in financial markets. On August 15, Merrill Lynch equity analysts cut their rating on Deutsche Bank, saying the squeeze in credit markets will reduce earnings.
The French and Italian finance ministries have urged Trichet to keep rates unchanged.
“We’ve had a severe deficit of confidence that fuelled a liquidity shortage, which will in turn reduce the amount and terms of credit to companies,” French finance minister Christine Lagarde said in an August 24 interview. “There has to be deep thinking about what is really taking place.”
Whether Trichet, 65, follows through with his August plan to raise borrowing costs will depend on how successful he is in calming market turbulence and ensuring it doesn’t curb economic growth. The euro-region economy slowed more than forecast in the second quarter, and a report last week showed manufacturing and services growth slackened in August.
The ECB is already using other tools to smooth inter-bank lending, extending loans and adding 211.3 billion euros of extra cash to the money market between August 9 and August 14. Should these operations ease investors’ concerns, Trichet may be able to keep fighting inflation, said Marco Annunziata, chief economist at UniCredit Markets and Investment Banking in London. The ECB is “highlighting a crucial distinction: While they are injecting liquidity as a short-term tactical move, their strategic policy stance does not necessarily change,” Annunziata said.
In his first speech since the financial-market rout began, Trichet may disappoint investors wanting a clear signal whether he will raise interest rates on September 6. He may instead keep his options open, pledging liquidity to the banking system without closing the door on an increase. He speaks at 3 pm in Budapest.
“The ECB is far from decided,” said Michael Hume, chief European economist at Lehman Brothers Holdings in London. Trichet’s speech “seems too soon to clarify matters.”
A week ago, investors bet that the global contraction in credit would prevent the ECB lifting its benchmark rate from 4%. That view is now in doubt after the ECB on August 22 loaned an additional 40 billion euros to banks and said it was sticking to the policy stance expressed by Trichet on August 2. Then, he promised ‘strong vigilance,’ a phrase used to foreshadow each of the eight rate increases since 2005.
Investors reacted by reviving their wagers that the ECB will boost borrowing costs by a quarter point in September. The implied rate on the September interest-rate futures contract rose to 4.57% last week from 4.34% on August 10. At the same time, some economists have scrapped their forecasts for further ECB tightening.
“Additional tightening from the ECB now risks exacerbating the current crisis and could prompt an even sharper slowdown,” said James Nixon, an economist at Societe Generale in London who used to work as a forecaster at the ECB. “We now expect the ECB to hold rates at 4% until at least the spring of next year.”
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There is evidence that the fallout from the collapse in the American market for subprime mortgages is hurting Europe.
BNP Paribas, France’s biggest bank, was forced to halt withdrawals from three of its investment funds, while Landesbank Sachsen Girozentrale, the German state-owned bank, is getting emergency funding.
UBS, Europe’s largest lender, said August 14 profit may decline for the rest of the year because of turmoil in financial markets. On August 15, Merrill Lynch equity analysts cut their rating on Deutsche Bank, saying the squeeze in credit markets will reduce earnings.
The French and Italian finance ministries have urged Trichet to keep rates unchanged.
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“We’ve had a severe deficit of confidence that fuelled a liquidity shortage, which will in turn reduce the amount and terms of credit to companies,” French finance minister Christine Lagarde said in an August 24 interview. “There has to be deep thinking about what is really taking place.”
Whether Trichet, 65, follows through with his August plan to raise borrowing costs will depend on how successful he is in calming market turbulence and ensuring it doesn’t curb economic growth. The euro-region economy slowed more than forecast in the second quarter, and a report last week showed manufacturing and services growth slackened in August.
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The ECB is already using other tools to smooth inter-bank lending, extending loans and adding 211.3 billion euros of extra cash to the money market between August 9 and August 14. Should these operations ease investors’ concerns, Trichet may be able to keep fighting inflation, said Marco Annunziata, chief economist at UniCredit Markets and Investment Banking in London. The ECB is “highlighting a crucial distinction: While they are injecting liquidity as a short-term tactical move, their strategic policy stance does not necessarily change,” Annunziata said.
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