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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7259)	11/18/2005 5:57:55 PM
From: John Pitera	Read Replies (2) \| Respond to of 33421

ECB President Trichet Signals Imminent Rate Rise Trichet Says European Central Bank Is 'Ready to Take a Decision' By G. THOMAS SIMS Staff Reporter of THE WALL STREET JOURNAL November 18, 2005 11:54 a.m. FRANKFURT – Jean-Claude Trichet, president of the European Central Bank, signaled that the ECB would raise its key interest rate on Dec. 1, a sign that the global inflation trend has now reached slow-growth Europe. "After two and a half years of maintaining historically and exceptionally low interest rates ... the governing council is ready to take a decision to move interest rates," Mr. Trichet said Friday. He added that the central bank is prepared to "moderately augment" rates. The ECB, which next meets Dec. 1, has kept its key refinancing rate unchanged at 2% since June 2003. The ECB has been growing more concerned about risks of higher inflation in recent months, and financial markets expect the central bank to raise its key rate by at least a quarter percentage point. Inflation is currently 2.5%, well above the bank's aim of keeping inflation just under 2%. Mr. Trichet's remarks come just a day after the ECB held its regular mid-month meeting, which usually doesn't deal with issues of monetary policy. But the ECB has come under some criticism for sending mixed signals on rates, and Mr. Trichet's unusual clarity is surely an attempt to clear the air. Mr. Trichet is an advocate of clear communications and has sworn he never would purposely surprise financial markets, though this is the first time the bank would alter rates during his two-year tenure. A rate increase is almost sure to ignite concerns in some quarters. Rodrigo de Rato, managing director of the International Monetary Fund, Friday gave a cautious outlook on the euro-zone economy, saying economic recovery hasn't been "spectacular" and that he doesn't see inflationary pressures building. He made those statements to journalists after a meeting with Mr. Trichet. (See related article1.) Mr. Rato sounded less concerned about inflation than the ECB, noting that so-called core inflation that strips out high energy prices and other short-term factors remains low. "We see headline inflation increasing, but we don't see core inflation reflecting those pressures," Mr. Rato said. "We don't see too many increased pressures in the wages right now. So in that respect, we understand perfectly the vigilance of the ECB and we commend its capacity to anchor inflationary expectations in Europe, but the data right now show that though you see headline inflation increasing, you don't see that in core inflation," Mr. Rato said. The ECB last year was also preparing to raise rates, but the move was then derailed by a surprise slowdown in the economy. Over the past few weeks, the bank has been regularly reassured that the 12-nation euro zone is strong enough to weather a rate increase in rates, currently at a historically low 2% since June 2003. According to figures released earlier this week, gross domestic product in the euro zone grew by 0.6% from July to September, or an annualized rate of 2.4%. That was better than the sluggish 0.3% in the previous quarter, as European exporters benefited from booming global demand for manufactured goods and a lower exchange rate. But most important for the ECB is inflation. With inflation well above the bank's target, the ECB will miss its inflation target for a sixth consecutive year this year, an unfortunate track record for a bank that has only been in operation seven years. The bank is concerned that it will miss that target again next year. The ECB published a survey last week which showed that professional forecasters believe there is a growing risk that the bank will miss its inflation target in 2007 and beyond. This is of grave concern to a central bank that is legally mandated to prioritize fighting inflation above supporting economic growth. The bank feels that its low rates may be contributing to a housing bubble in some countries -- such as France and Spain. Lending for home purchases has been growing at an annual 10% rate for much of the past year. Many economists don't expect the ECB to begin tightening policy in a series of moves similar to the U.S. Federal Reserve, which has raised rates in 12 consecutive steps. Kevin Gaynor, head of financial markets economics at the Royal Bank of Scotland, said the ECB could move by another quarter percentage point early next year -- bringing rates to 2.5% -- but that the economy could already begin slowing after March. He also considers the recent move up in inflation as a "temporary blip." "This is simply aimed at maintaining credibility and capping inflation expectations," says Mr. Gaynor. Write to Dow Jones Newswires editors at asknewswires@dowjones.com2