Heinz's predicted rate war may well begin anyway....
Fri, 25 Aug 2000, 7:01am EDT
European Economies: ECB's Welteke Signals Higher
Interest Rates
By Catherine Hickley
Frankfurt, Aug. 25 (Bloomberg) -- Bundesbank President Ernst Welteke warned
that the euro's slide and soaring oil prices are sucking inflation into the 11
nations sharing the European currency, comments that reinforced investors'
expectations the European Central Bank will raise interest rates.
There's an ``increasing'' risk that inflation will accelerate, Welteke said. The ECB
is ``anything but satisfied'' with the euro's exchange rate, he said.
The European single currency has shed a tenth of its value against the dollar this
year, and more than a fifth since its introduction in January 1999. A German
report today showed that the currency's weakness increased the cost of
imported goods, such as raw materials, for a third consecutive month in July.
While another German release today showed prices paid by consumers declined
0.1 percent in the four weeks to mid-August, analysts predicted a rebound in
coming months, as rising import prices feed through to the rest of the economy.
Already factories are passing their higher costs on to customers. Producer
prices, which include energy and machinery, rose at the fastest pace in nine
years in July, the government said yesterday.
Germany's headline inflation rate, based on annual growth in consumer prices,
declined to 1.8 percent in the four weeks to mid- August from 2 percent in the
previous month, though it's ``reasonable to assume that the rate will move back
toward 2 percent in September,'' according to Alison Cottrell, an economist at
PaineWebber International.
Welteke, one of 17 officials that vote on ECB interest rates, has previously
played down the risk of inflation, focusing more on the need to boost economic
growth. As recently as last month he said that inflation risks in the euro zone
were ``relatively low.'' Today's comments, made in a speech at the Bundesbank's
regional branch in Dusseldorf, suggest there may already be a consensus among
policy-makers on raising rates.
Inflation Risks
ECB Chief Economist Otmar Issing, and Matti Vanhala, head of the Finnish
central bank, said earlier this week that inflation risks were increasing. The euro
zone's inflation rate reached 2.4 percent in July, staying above the ECB's 2
percent limit for a second consecutive month.
The yield on interest-rate futures contracts for September delivery rose 3 basis
points today to 4.98 percent, on mounting expectation among investors that the
ECB will raise rates. The ECB is likely to raise rates at one of its next two
meetings of policy- makers, either on Aug. 31 or Sept. 14, analysts said.
The increase in the refinancing rate will probably be limited to a quarter point, to
4.5 percent, because of concern about signs the German economy may be
slowing, analysts said. The central bank has already increased interest rates five
times since November. The last move was on June 8.
Both business and consumer confidence declined for a second consecutive
month in July, recent reports showed. Car sales fell 19 percent in July from a
year earlier. Manufacturers' production declined in June, while the construction
industry reported lower orders in the same month.
Unemployment
The 9.5 percent unemployment rate in Germany, which accounts for a third of the
euro region's gross domestic product, is still more than twice as high as the level
in the U.S. German Chancellor Gerhard Schroeder's main aim is to reduce
joblessness.
The ECB, however, has to balance the need to sustain growth in Germany
against spiraling inflation in countries such as Ireland, Spain and the
Netherlands. Ireland's inflation rate is the highest in the euro region, at 5.9
percent.
Even in Gemany, ``costs will remain very high,'' said Axel Angermann, an
economist at the VCI chemicals association, which represents 1,500 companies.
German import Prices rose 0.4 in July from June, twice the gain predicted by
analysts, and climbed 10.9 percent from July 1999. Excluding oil products, the
index rose 0.5 percent in the month and 6.6 percent in the year, the government
said today.
Factories increased prices at the fastest pace in nine years in July, passing on
higher raw material and oil costs to customers, a report yesterday showed.
Soaring Oil Prices
Oil costs have almost tripled in the last 18 months, adding to pressure on prices
caused by the euro's decline. Degussa-Huels AG, the world's second-biggest
maker of pigment blacks, used to make ink and rubber, the German unit of Ford
Motor Co., the world's second-biggest carmaker, and other manufacturers are
raising prices to finance their higher costs.
The Organization of Petroleum Exporting Countries agreed in June to raise output
by 500,000 barrels a day if the price of oil tops $28 for 20 consecutive trading
days. OPEC officials will meet on Sept. 10 to decide whether to raise output. A
barrel of Brent crude today cost $30.35. |
