ECB Officials Signal More Interest Rate Increases This Year

Monday, 18 Apr 2011 09:09 AM

 

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European Central Bank Governing Council members signaled they will keep tightening monetary policy this year to curb inflation as the economy strengthens.

Investor expectations that the benchmark interest rate will be increased by another 50 basis points in 2011 are “well- founded,” Austria’s Ewald Nowotny told Bloomberg News in Washington on April 16. Luc Coene of Belgium said in an interview yesterday that monetary “conditions are too accommodative.”

The suggestion that the ECB will soon raise its key rate again was echoed by other policy makers at the weekend meeting of the International Monetary Fund, even after President Jean- Claude Trichet said this month’s quarter-point boost to 1.25 percent wasn’t necessarily the start of a series. Higher euro- area borrowing costs at a time when the U.S. Federal Reserve is signaling no imminent move in its near-zero policy rate may support the euro after it fell last week on concern Europe’s sovereign debt crisis isn’t over.

“Apparently there’s consensus in the Governing Council to push interest rates higher,” said Juergen Michels, chief euro- area economist at Citigroup Inc. by telephone from London. “It’s not only about containing inflation but also to underline the bank’s credibility.”

Balancing Needs

The euro, which has climbed 7 percent against the dollar this year, eased to $1.4373 at 9 a.m. in Frankfurt from as high as $1.4482 overnight.

The ECB is balancing the need for tighter policy in countries like Germany, whose economy is booming, against the risk that it could exacerbate the debt crisis afflicting Greece, Ireland and Portugal. This month’s rate shift from a record low was the first increase since July 2008 and came as data showed inflation accelerated to 2.7 percent in March, the fastest since October 2008 and breaching the bank’s 2 percent limit for a fourth month.

“We see a significant increase in inflationary pressure,” Axel Weber of Germany said as he attended his final IMF talks before stepping down this month as Bundesbank president. Current policy is “supportive of the economy and expansive.”

Traders expect the ECB to raise its rate to 1.75 percent by the end of the year, Eonia forward contracts show. Economists project the same result, according to the median of 24 forecasts in a Bloomberg News survey this month.

Revise Inflation Forecast

“It’s obvious that we have to take price movements very seriously,” Nowotny said. The central bank “will of course” revise its inflation forecast after estimating in March that it would average about 2.3 percent this year, he said.

“It’s not clear” whether the current price trend “is temporary as we might wish it to be,” Athanasios Orphanides of Cyprus said in an April 14 interview with Bloomberg Radio’s Tom Keene in New York. “We cannot ignore what’s happening to food and energy prices going forward.”

The IMF last week increased its growth prediction for the euro region to 1.6 percent in 2011 and 1.8 percent in 2012. Euro-area exports rose 1.6 percent in February from the previous month and German factory orders jumped almost five times as much as economists forecast, indicating Europe’s largest economy remains robust after its strongest expansion in two decades last year.

“Economic growth is now self-sustained and risks are balanced,” Trichet said April 15 in Washington. Luxembourg’s Yves Mersch said in an interview yesterday that “the growth dynamic is carrying on and is firming” and that policy remains “very accommodative.”

Liquidity Support

Investors may also face a further withdrawal of the emergency liquidity support that was introduced during the financial crisis and maintained when Europe’s debt strains threatened to break the euro a year ago. The ECB this month kept its programs to provide unlimited liquidity to banks and purchase the bonds of debt-strapped governments.

“It’s quite obvious that both our interest-rate regime and our liquidity regime have been in crisis mode for quite a long period of time,” Nowotny said. For the euro region as a whole, “we’re not any longer in a crisis situation” and “this development will be reflected in the ECB’s policy.”

At the same time, Greece’s government is struggling to convince investors that it won’t have to renege on its debts after receiving a 110 billion-euro ($159 billion) bailout last year from the European Union and the IMF.

Greek Yields

Yields on Greece’s 10-year bonds surged to a euro-era record last week and the euro fell from a 15-month high versus the dollar on concern that the country may default.

Nowtony said he sees “no need” for a restructuring of Greek debt and echoed his colleagues in expressing confidence that the crisis won’t spread to a fourth nation after Portugal and Ireland also sought assistance.

“It is very likely” that Portugal will be the last country to require help, ECB Vice President Vitor Constancio said in an interview on April 15. “That’s what we hope markets will appreciate, that Europe has created the mechanisms to deal with the problem and that some more vulnerable situations were dealt with.”

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