European Central Bank warns that days of low interest rates are set to end

EUROPEAN Central Bank chiefs issued a stern warning yesterday on inflation, raising prospects of higher interest rates.

With the eurozone economic region flat in terms of growth, analysts had concluded interest rates would hold at 2% until early in 2007.

That view changed significantly yesterday although the ECB kept interest rates pegged at historic lows.

ECB President, Jean Claude Trichet, said after the European Central Bank’s monthly meeting that current key lending rates of 2% were still adequate despite renewed upward pressure on prices from sharp oil price hikes.

Despite market developments “we have concluded that the monetary policy stance still remains appropriate,” he said.

He warned however “strong vigilance with regard to upside risks to price stability is warranted. It is essential that the increase in the current inflation rate does not translate into higher underlying inflationary pressures in the euro area“.

Market analyst, Niall Dunne, economist with Ulster Bank Markets, said Mr Trichet’s warning was not a surprise.

Two things have changed in the past month pointing to a renewal of interest rate pressure, said Mr Dunne.

Recent EU indicators suggest inflation is currently running at 2.5%, the highest level since the euro was set up.

Keeping price increases close to 2% is the ECB’s sole mandate and it is statutory obliged to ensure that inflation figure is held to as near as is possible.

Any suggestion that such pressures will hit inflation harder means the ECB could be forced to change its stance sooner than expected, warned Mr Dunne.

That send factor is beginning to emerge, he said. Better than expected economic figures for the region are starting to emerge suggesting Europe is emerging from its protracted growth slump.

If those twin factors continue to hold over the next few months Mr Dunne says the days of historic low interest rates may end sooner than expected.