European Central Bank President Jean-Claude Trichet left the door open for further interest-rate increases to tame inflation after raising borrowing costs for the first time in almost three years.
Inflation risks remain on the upside and the ECB’s monetary policy is still “accommodative,” Trichet said at a press conference in Frankfurt after lifting the benchmark rate by a quarter percentage point to 1.25 per cent. While “we did not decide it was the first in a series of interest-rate increases, you know from our own doctrine that we always do what is necessary to deliver price stability over the medium term,” he said.
The ECB is balancing the need for tighter policy in countries like Germany, whose economy is booming, against the risk that higher rates could exacerbate the sovereign debt crisis afflicting peripheral euro-area nations. While bonds erased declines and the euro initially fell after Trichet’s comments as some investors pared bets on rapid rate increases, markets still expect the ECB to raise its benchmark to 1.75 per cent by the end of the year, Eonia forward contracts show.
“Trichet retained a relatively hawkish tone but the market has already priced in so much and there was nothing in there to extend that theme,” said Jane Foley, a senior foreign exchange strategist at Rabobank International in London. Trichet “is paving the way for further rate rises but he’s also clearly unwilling to commit the Governing Council to pre-announcing rate hikes”.
