ECB Raises Interest Rates to Six-Year High to Stem Inflation
By Gabi Thesing
June 6 (Bloomberg) -- The European Central Bank raised interest rates to a six-year high today to keep economic growth from fueling inflation in the 13 nations sharing the euro.
ECB policy makers, led by President Jean-Claude Trichet, increased the benchmark refinancing rate by a quarter-point to 4 percent, as anticipated by all 52 economists in a Bloomberg News survey. That's the eighth increase since late 2005 and the highest level since August 2001. The Frankfurt-based bank will increase its key rate at least once more this year, a separate survey shows.
The ECB has expressed concern that companies will use the strongest period of economic growth this decade to increase prices. The International Monetary Fund yesterday raised its European growth forecast for this year. Trichet may signal the bank is open to further rate increases when he gives a press briefing at 2:30 p.m. in Frankfurt and issues new forecasts for economic growth and inflation.
``The ECB, like many others, may have underestimated the economic growth dynamic in the euro area,'' said Thorsten Polleit, chief Germany economist at Barclays Capital in Frankfurt. ``They will leave the door open for further rate increases by highlighting upside risks to inflation, but Trichet will probably drop a reference to `accommodative'.''
Removing `Accommodation'
The ECB has described its previous rate increases as a process of removing monetary ``accommodation,'' taking borrowing costs to a level that no longer stimulates economic growth. Economists say that process will end today and the bank must find new language to signal it may raise rates to a level that restricts growth.
``The key is how Trichet will characterize monetary policy, whether he says it still supports growth and whether rates have peaked,'' said Guillaume Menuet, an economist at Merrill Lynch & Co. in London. He expects one more increase in September ``if European data continue to surprise on the upside.''
Data over the past month have strengthened the case for higher rates. Europe's economy grew at three times the pace of the U.S. in the first quarter. Business and consumer confidence unexpectedly rose last month to the highest since 2001 and unemployment fell to a record low in April.
The euro-region economy will grow about 2.5 percent this year, the Washington-based IMF said yesterday, raising its forecast from 2.3 percent. In 2006, the economy grew 2.7 percent, the fastest since the turn of the decade.
New Forecasts
``Key fundamentals for continued solid growth are in place,'' the IMF said, and called on the ECB to raise interest rates further to curb a ``firming of price trends.''
The ECB currently expects inflation to average about 1.8 percent this year, holding below its 2 percent limit for the first time since 1999, before accelerating to 2 percent in 2008.
``Future monetary policy will hinge on the new inflation forecasts,'' said Kenneth Wattret, chief euro-area economist at BNP Paribas in London.
ECB council member Nicholas Garganas said in an interview in Athens on May 29 that the bank will probably raise its inflation forecast for 2007. All options on further rate increases, including size and pace, are still ``open,'' he said.
Some labor unions have used the pace of economic growth to push through wage increases. Germany's IG Metall, the country's largest union, on May 4 won a 4.1 percent raise for 12 months starting in June for 800,000 workers in the metals industry.
The pay increase may serve as a benchmark for as many as 3.4 million metal, electronics and car workers in Europe's largest economy.
`Exaggerated' Concerns
Adding to the ECB's concerns, money-supply growth in the euro region, which the bank uses as a gauge of future inflation, held close to the fastest pace in 24 years in April.
Oil prices have also rebounded 30 percent since mid-January to $65.70 a barrel today.
``Given the unfavorable development in oil prices, inflation data for May was still rather positive'' at 1.9 percent, said Rolf Schneider, chief economist at Dresdner in Frankfurt. ``It shows that inflationary pressures are still relatively limited and the ECB's concerns therefore a little bit exaggerated.''
The euro-region economy is showing some signs of cooling. German manufacturing orders declined for the first time in three months in April, a government report showed today. Euro-region manufacturing expanded at the slowest pace in more than a year in May and retail sales dropped for the first time in three months, surveys of purchasing managers showed last week showed.
Still, futures trading suggests investors expect the ECB to raise its key rate at least once more this year. The implied rate on the three-month Euribor contract for December settlement was 4.57 percent today, up from 4.36 percent a month ago.
The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net
Last Updated: June 6, 2007 07:46 EDT |
