Trichet Leaves Door Open to Rate Increases After Jul


European Central Bank President Jean- Claude Trichet left open the option of raising interest rates again after July to contain accelerating inflation.

``I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations,'' Trichet told the European Parliament in Brussels today. ``I didn't say that we could envisage a series of increases. That being said, of course we never pre-commit.''

Trichet on June 5 said the bank may raise its benchmark lending rate by a quarter-point to 4.25 percent in July to damp price increases even as economic growth slows. Investors responded by betting the ECB will raise rates twice this year. Record oil and food costs pushed inflation to 3.7 percent last month, well above the ECB's 2 percent limit.

Trichet's comments today ``certainly did not seem to rule out more than one rate rise,'' said Julian Callow, chief European economist at Barclays Capital in London. ``It's not really saying much'' to say they're ``not envisaging a series of rate increases. Such comments seem if anything to suggest a slightly higher risk that the ECB might raise rates more than once.''

When the ECB embarked on its last rate-tightening cycle in December 2005, Trichet said the bank was ``not engaging in a series of increases.'' It proved to be the first of eight steps.

Trichet told lawmakers today that inflation pressures in the euro area have ``intensified further in recent months'' and that the bank is in a state of ``heightened alertness.''

``The Governing Council remains particularly concerned that current elevated inflation rates may become entrenched in private inflation expectations,'' Trichet said.

Those expectations, measured by the breakeven on five-year French inflation-indexed bonds, rose to 2.52 percent today from 2.12 percent in March.

ECB council members are split over the best way forward for monetary policy. Nout Wellink of the Netherlands said today the ``ECB will do everything to prevent high inflation over the long term'' and that price gains aren't ``ebbing away.''

By contrast, France's Christian Noyer today said he's ``optimistic on the evolution of inflation, provided the energy and raw material prices calm down and that we don't have a subsequent shock.''

The price of oil has doubled over the past year to $134.38 a barrel today, boosting companies' costs and squeezing household incomes.

Euro-region manufacturing and service industries contracted in June as companies grappled with surging energy costs and the euro's 16 percent appreciation against the dollar in the past year, which has made exports less competitive.

The ECB ``appears willing to push key regions into recession'' by raising rates to meet its ``excessively low'' inflation goal, said Stuart Thomson, a money manager at Resolution Investment Management Ltd. in Glasgow, Scotland, which oversees $46 billion.

Trichet said the region's fundamentals remain ``sound'' and modified his June 5 statement on the economic outlook.

``Growth is projected to reach its trough already in mid-2008 before gradually recovering,'' he said. Two weeks ago, Trichet said economic expansion would reach a ``trough in 2008.''

Investors expect the ECB to raise the benchmark rate to 4.5 percent by December and most predict a third step by March, Eonia forward contracts show.

 


TradingEconomics.com, Bloomberg
6/25/2008 6:44:55 AM