ECB president hints at rate rise

EUROPEAN Central Bank president Jean-Claude Trichet has said market bets on an interest rate increase as soon as next month are reasonable amid accelerating economic growth in the 12-nation euro region.

“What I see in the short-term expectations of moves seems to be reasonable,” Mr Trichet told a briefing in Frankfurt yesterday after the ECB kept its benchmark rate at 2.25%.

The bank will “exercise vigilance” to ensure the “solid anchoring of inflation expectations”. He declined to say the current level of rates is “appropriate”. The ECB raised rates for the first time in five years on December 1, from a six-decade low of 2%, to contain rising prices.

The bank forecasts inflation above its 2% ceiling for a seventh year in 2006 as the economy gathers pace and surging oil costs stoke demands for higher wages.

Investors expect the ECB will raise the rate to 2.5% at its March 2 meeting and as high as 3% by the end of 2006, futures trading shows. The implied rates on the three-month contracts for March and December settlement were 2.69% and 3.18% respectively yesterday. The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB’s benchmark rate since the currency’s launch in 1999.

European bonds initially gained and the euro weakened as Trichet’s comments were interpreted as dampening prospects of faster rate increases. They later reversed those moves.

“The clear message is that the ECB is still looking to raise rates,” said Orlando Green, a fixed-income strategist in London at Calyon, the securities unit of Credit Agricole SA.

“The market may catch its breath intermittently but everybody is looking for bonds to fall and that’s a pretty heavy weight.” The euro traded at $1.2091, up from $1.2067 when Mr Trichet began his press conference yesterday.

“Trichet was as clear as he could be,” said Elga Bartsch, an economist at Morgan Stanley in London. “However, he’s trying to stress that the ECB won’t switch to autopilot after March.”

All 35 economists in a Bloomberg News survey expected the ECB to keep rates unchanged yesterday. The bank would probably raise rates next month, the survey showed. The ECB said last month that the economy will expand about 1.9% this year after 1.4% in 2005. It is due to update that forecast on March 2.