ECB ‘stands ready’ to raise rates

THE European Central Bank (ECB) yesterday warned borrowers to expect higher loan repayments in the short term after it said it was ready to raise interest rates.

Speaking after the bank left interest rates on hold for the 29th month in a row, ECB president Jean-Claude Trichet said the bank “stands ready at any time” to push rates up to combat higher inflation.

Economists said Mr Trichet had raised expectations of an interest rate hike and that the bank was likely to deliver on its hints before too long.

Mr Trichet once again said “strong vigilance” was required to keep inflation in check and added that headline inflation rates were now running “significantly” higher than the bank’s 2% target. Oil prices appeared to have stabilised and were likely to have a lasting effect on inflation in the future.

“Markets expect oil prices to remain at high levels, driven mainly by buoyant global demand and, to some extent, by fragilities on the supply side. This suggests a more lasting impact of energy prices on overall price developments,” he said.

Barclays Capital economist James Nixon said signs that eurozone growth levels were picking up meant higher rates were more likely in the New Year and that Mr Trichet had continued to drop hints about the ECB’s future plans.

“They have ratcheted up their hawkish rhetoric. What was missing was a move to prepare markets for a December rate hike,” he said.

The financial markets have already started to prepare for a rate hike, with some analysts predicting the ECB could move as early as next month.

Mr Trichet also said that, while inflation was ahead of target, there was “no clear evidence of domestic inflationary pressures.”

But he warned of the need to keep an eye on housing markets in certain eurozone member states and noted the “robust” nature of growth in personal borrowing, especially in the mortgage market.

In a separate development yesterday, outgoing US Federal Reserve chairman Alan Greenspan said the American economy had developed strong momentum but warned over potential inflation problems in the months ahead.

The Federal Reserve raised its base interest rate by 0.25% for the 12th time in a row earlier this week, bringing the base rate to 4%, or 2% higher than in the eurozone.

“Structural productivity continues to grow at a firm pace, and rebuilding activity following the hurricanes should boost real GDP growth for a while,” said Mr Greenspan, appearing for the last time in front of the US Congress’s joint economic committee.

Mr Greenspan, who is 79, will step down after Christmas to be replaced by White House economic advisor Ben Bernanke.