Trichet Says ECB May Raise Rates, Show ‘Strong Vigilance’
March 03, 2011, 9:22 AM EST
By Jeff Black and Jana Randow
(Updates with economist’s comment in fifth paragraph, forecasts in sixth.)
March 3 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month to fight accelerating inflation pressures.
An “increase of interest rates in the next meeting is possible,” told reporters in Frankfurt today after the central bank left its key rate at a record low of 1 percent. “Strong vigilance is warranted,” Trichet said, adding that any increase would not necessarily be the start of a “series” of moves.
Trichet is signalling tighter policy at a time when Ireland and Greece are struggling to cope with the terms of last year’s European Union bailouts and governments are hammering out a plan to draw a line under the crisis. The danger is that raising rates to tackle inflation will exacerbate the financial tensions that still run through euro region bond markets.
The euro rose more than 0.9 percent after Trichet’s remarks to the highest since November and traded at $1.3950 as of 3:07 p.m. in Frankfurt. German government bonds, a benchmark for Europe, dropped, sending the yield on the two-year bund 18 basis points higher to 1.713 percent.
“They will hike in April unless market reaction to the end-March EU meeting is very disappointing, then probably will pause until late summer,” Marco Valli, an economist at UniCredit Group in Milan, said in an e-mail. “They wanted to give a shock message today to show to everybody that they are serious about price stability.”
Economic Forecasts
Trichet announced the bank’s quarterly economic forecasts, which showed officials raised the lower band of their growth predictions for this year and next, and increased their outlook for inflation. Consumer prices will rise in a range of 2 to 2.6 percent in 2011, up from a December forecast of between 1.3 to 2.3 percent, he said.
The ECB is “prepared to act in a firm and timely manner,” Trichet said, though he cautioned against expecting a “big” interest-rate move.
“Trichet is playing down the staff inflation projections due to the move in oil prices since the projections were set, and emphasising the current very accommodative stance” of the ECB, Nick Matthews, an economist at Royal Bank of Scotland Group Plc in London, said in an e-mail. “The use of “strong vigilance” clearly indicates the ECB is signalling a rate hike next month.”