EUROPEAN CENTRAL Bank chief Jean–Claude Trichet has issued a hawkish warning of rising inflation in the euro zone, leading analysts to conclude that higher interest rates are in prospect this autumn.
While Mr Trichet said the bank’s governing council saw no need “so far” to change its assessment that prices would remain generally stable, he said inflation could rise above the 2.2 per cent level seen in December. The increase from 1.9 per cent in November was “somewhat higher than expected” and was largely attributable to energy prices, he added.
However, Mr Trichet warned that the situation in sovereign debt markets remained urgent, and he backed a call by European Commission president José Manuel Barroso for a swift agreement to reinforce the euro zone rescue fund.
While Mr Barroso wants a deal at a European summit on February 4th, Germany suggested yesterday that a scheduled summit in March was a more realistic target.
Pressure on the European authorities eased yesterday when Spain tapped bond markets to sell €3 billion in five-year debt. The interest rate – 4.542 per cent – was a percentage point more than in a November sale but below levels feared by some observers.
Following a relatively successful sale by Portugal on Wednesday, the euro rose to its highest level for a week, and the premium investors sought to hold Spanish, Portuguese and Italian debt fell.
Mr Trichet warned that inflation was likely to stay slightly above 2 per cent before moderating again towards the end of year. Even though such a rate would be above the ECB target of keeping inflation below but close to 2 per cent, Mr Trichet said policy-makers saw no need “so far” to change its assessment that prices would remain generally stable in the medium term. Still, he said very close monitoring was warranted.
Citing the bank’s last rate increase in July 2008 just before the collapse of Lehman Brothers, he said the climate then was “not easy” but the decision was appropriate. “We are permanently alert. We are never pre-committed not to move interest rates, and our level of interest rates is designed to permit to deliver price stability.”
His remarks – on the day the ECB left its main interest rate at a record low of 1 per cent for the 21st month – led analysts to review their own forecasts for European interest rates.
“Today’s strong wording suggests that the ECB may act earlier than we have expected so far,” said economists at Citigroup in a note. “Therefore, after increasing our inflation forecast last week, we advance our base case of the first rate hike from [the first quarter of] 2012 to [the second half of] 2011, probably before Mr Trichet’s term ends on October 31st.’’
Asked at his monthly press conference in Frankfurt about a looming euro group discussion on the interest rate on Irish bailout loans, Mr Trichet said the interest rate was the responsibility of European governments, but added that the rescue plan was sufficient to stabilise the economy.
“I did not mention Ireland in the introductory statement. You might remember that we mentioned Ireland in our last introductory statement.
“I had said on behalf of the governing council in December that we are welcoming the economic and financial adjustment programme agreed by the Irish Government, and that we consider that the programme contains the necessary element to bring about a sustainable stabilisation of the Irish economy.”
Reiterating his call on EU leaders to improve the effectiveness of the euro zone rescue fund “in quantity and in quality”, he said the situation in sovereign debt markets emphasised the need for “a sense of direction” from EU leaders.
