European Central Bank (ECB) President Jean-Claude Trichet may indicate how fast he’s prepared to raise interest rates to fight surging inflation after the bank kept them on hold today.
ECB officials meeting in Helsinki left the benchmark rate at 1.25 per cent, as predicted by all 48 economists in a Bloomberg News survey. The central bank in April raised the key rate from a record low of 1 per cent, the first increase in almost three years. If President Trichet calls for “strong vigilance,” it would signal another move in June. He holds a press conference at 3.30 pm local time.
ECB officials including Italy’s Mario Draghi, seen as the frontrunner to replace Trichet from November, have signalled they’re in favour of further monetary tightening to fight inflation that quickened to 2.8 per cent last month, the fastest in two and a half years. Their task of normalising policy is being complicated by governments struggling to contain Europe’s debt crisis that forced Portugal to ask for external help last month.
“Inflation is clearly above the ECB mandate, so you need a normalisation of rates,” said Stephane Deo, chief Europe economist at UBS Securities in London. “The question now is not whether the normalisation will happen, but at what pace.”
‘EXCEPTIONALLY LOW’
The Bank of England kept its benchmark rate at a record low of 0.5 per cent today. In the US, the Federal Reserve last week retained its pledge to keep rates “exceptionally low” for an “extended period” to bolster the world’s largest economy.
Monetary policy elsewhere is becoming tighter. Central banks in the Philippines and Malaysia today raised interest rates, and India this week increased its borrowing costs for the ninth time since March 2010. Rates in China, Asia’s biggest economy, may rise further after its central bank said yesterday that taming inflation is its top priority.
The 17-nation euro-area economy will grow 1.7 per cent this year and 1.8 per cent in 2012, according to ECB forecasts. Inflation will average 2.3 per cent this year and 1.7 per cent next year, the bank predicted in March. It will issue new projections in June.
With surging oil costs fuelling price pressures, ECB Executive Board member Jose Manuel Gonzalez-Paramo said on April 26 that the period of “abnormally low” interest rates “may be ending”.
Draghi has also sharpened his language. While Trichet said last month’s rate step wasn’t necessarily the start of a series, Draghi signalled more to come. “Monetary policy must take into account the emergence of inflationary tensions, pushed by rising food and energy prices,” he said on April 13.
