European Central Bank President (ECB) Jean-Claude Trichet is fighting a war on two fronts as he seeks to contain price pressures while the Greek crisis threatens to blow the euro area apart.
The ECB will raise interest rates for a second time this year, increasing the benchmark by 25 basis points to 1.5 per cent, when council members meet in Frankfurt today, according to all 55 economist forecasts in a Bloomberg News survey. The central bank may increase borrowing costs further in the fourth quarter, according to a separate survey.
Trichet is at odds with European leaders over how to contain the debt crisis, saying it’s up to nations to plug budget gaps as policy makers fight price gains. While the ECB has supported lenders with unlimited cash, authorities are struggling to restore investor confidence. Portugal was cut to junk by Moody’s Investors Service on July 5 on concern the country will need to follow Greece in seeking more aid.
“Trichet has drawn a line in the sand on Greece and he’s now focusing on the day job,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group in London. “The ECB has done more than governments have to prop up the euro area and it really is losing patience with political leaders. It’s up to them to fix the problem.”
Critical Phase
The ECB will announce its decision at 1.45 pm and Trichet, whose term ends on October 31, holds a briefing 45 minutes later. The Bank of England will keep its key rate at 0.5 per cent today, according to a separate survey.
The euro was at $1.4302 as of 9.30 am in Frankfurt, down 0.1 per cent on the day. The currency has shed 2.7 per cent against the dollar over the past month.
European finance ministers earlier this month authorised an ¤8.7-billion ($12 billion) loan payout to Greece in an attempt to avert the region’s first sovereign default. Standard & Poor’s and Fitch Ratings have both indicated they would cut Greece to default if leaders went ahead with a plan to ask creditors to roll over expiring Greek bonds into new debt.
Trichet met with Greek Finance Minister Evangelos Venizelos in Frankfurt today, according to the Finance Ministry in Athens.
“We’re entering a more critical phase” and there’s “a lot of uncertainty in the market,” Christopher Pissarides, professor at the London School of Economics, told Bloomberg Television in an interview in Brussels yesterday. The ECB “can afford to wait a little longer, to make it easier for countries like Greece, Portugal and the periphery that are going deeper into a recession because of these debt problems.”
Waning Confidence
While leaders are still seeking ways to fight the crisis, Europe’s recovery is already losing momentum. Services and manufacturing growth slowed more than estimated in June and economic confidence weakened. In Germany, Europe’s largest economy which has powered the region’s recovery, investor sentiment dropped to a 2 and a half year low last month.
Weaker growth may help curb price pressures and prompt the ECB to raise interest rates less aggressively than investors and economists initially estimated, said Julian Callow, chief European economist at Barclays Capital in London.
