ECB signals interest rate stability

EUROZONE interest rates will stay lower for longer, the latest comments from the European Central Bank (ECB) indicate.

IIB Bank chief economist Austin Hughes says ECB president Jean Claude Trichet’s comments yesterday intended to signal no change in interest rates for some considerable time.

“We still see a rate hike before end of the year but the tone of ECB comments is consistent with no move until 2006,” he said.

Mr Trichet sees the near term outlook as subdued but expects eventual strengthening of activity.

The sluggish eurozone economy and the absence of price pressure argue against a rate hike but Mr Hughes says promise of an eventual improvement means there is no need for a rate cut.

“Arguably the continuing reference to upside risks to price stability serves in part as a counter to emerging calls for a rate cut in response to recent disappointing eurozone economic data.”

Mr Trichet emphasised a cut could be counterproductive in that it could lead to a rise in term interest rates if investors concluded a further cut would raise further inflation risks.

“Mr Trichet may be exaggerating the point but there is some sense in the view that holding official rates where they are offers scope for markets to romance the notion of a further rate cut,” said Mr Hughes.

“Based on today’s ECB statement it could readily be argued that there will be no rise in eurozone interest rates until 2006. We expect a healthier global economy to prompt a rise in rates before end year,” he said, but warned, “We haven’t yet abandoned our forecast of a hike as early as September.”