ECB president signals further rate rise

THE European Central Bank left interest rates steady yesterday and said it remains on high alert in the fight against inflation, a signal markets understood to mean another rate rise next month.

ECB President Jean-Claude Trichet warned that inflation, now hovering around 1.7%-1.9%, may be only temporarily lower and upward price pressures will intensify later this year, feeding speculation the ECB will keep hiking after March.

“Strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialise,” he said, presenting the ECB’s monthly policy statement.

“This will permit medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels consistent with price stability.”

The ECB has used the key word “vigilance” every month before the six rate increases it has delivered since December 2005.

Asked if markets again should understand the phrase to mean a March rate rise, Mr Trichet said: “It speaks for itself.”

Mr Trichet also said credit costs in the eurozone are low and support economic growth, or “accommodative” in central bank-speak, even though the ECB has raised its key rate to 3.5% in 25 basis point steps over the past 14 months.

Financial markets viewed this tough language as a sure sign the ECB would push its key rate to 3.75% when it meets on March 8, and possibly keep on going to 4%.

European stocks slid, yields on European government debt jumped and the euro currency rallied broadly on prospects of costlier euro zone credit.

The Bank of England held its rate steady at 2.5% yesterday, as expected.

ECB policymakers over the past month have stressed the upward risks to inflation, particularly from higher wage demands, money supply growth at 16-year highs, a strengthening job market and oil prices, which are up almost $10 per barrel in the last three weeks.

These concerns were repeated in its February policy statement. Moreover, the ECB explained that inflation, which has been below its 2% ceiling since September, is low due to temporary factors, which will fade later this year, and that it would look beyond this monthly volatility.

The economy’s surprisingly strong start to 2007, despite budget tightening by some euro zone governments, is also keeping the ECB on high alert. Service sector growth spurted ahead, unemployment fell in Germany and France and consumer confidence stayed strong, although growth in manufacturing slowed in January.

The ECB said that growth risks are now balanced in the shorter term, wording that shows scant concern that costlier money will undermine the economic recovery. For the first time it noted that factories are using up their spare capacity, which is usually inflationary.

At the turn of the year, the shape of economic growth in the 13-nation currency region was in doubt.

But retailers and businesses are reporting that government belt-tightening, particularly Germany’s hefty increase in value-added tax (VAT), has dented growth only slightly. The US economy also is slowing less than feared.