ECB rate rises ‘cannot be ruled out’

A TOP European Central Bank figure warned yesterday further rate hikes cannot be ruled out, despite suggestions to the contrary.

Further increases would undermine Irish house prices which have been falling according to a new survey.

Since October house prices have gone down 3% in Dublin and by 10% in Galway. Asking prices elsewhere have held with the exception of Meath down 4.1%, Cavan 3.9% and Tipperary 3.1%, according to a daft.ie survey, Ireland’s biggest property website.

Meanwhile, on interest rates Nicholas Garganas, a governing council member of the ECB, said it would be a mistake to expect rates in the ECB to hold at the current level of 3.75%.

The ECB raised rates for the seventh time on March 8 to 3.75% since December 2005.

At the time the bank described the current level of rates as moderate against its previous low rating.

Such comments do not mean “we have reached what we would interpret as near the peak of the interest rate cycle”, he said.

If inflation risks persist the bank will act again and raise rates further, he said.

“As you know, we do not pre-commit to a particular interest rate path,” he said. “We really have to wait and see how things will develop, and that is why we closely monitor developments.”

Looking beyond the possibility of yet another rate hike in June Mr Garganas warned the highest risk to eurozone inflation, was wages, followed by the threat of further oil price increases, which are difficult to assess in the current state of uncertainty surrounding supply and demand, he said.

Meanwhile economic indicators confirm the euro area can look forward to continuing close to the zone’s potential level.

Rising employment and very favourable financing conditions for corporate investment will keep the outlook positive, he said.

“All of these help maintain a dynamic path for investment and bullish confidence,” Mr Garganas said.

“And all short-term indicators, soft data, really confirm this picture, even though we expect some smoothening of growth in the first quarter, as you know, because of the VAT increase in Germany.”

A slowdown in US growth to below its underlying potential would be compensated by stronger growth elsewhere in the world, ensuring that the eurozone would still benefit from demand for its exports, he said.

The ECB has forecast the eurozone economy will grow 2.5% this year, followed by 2.4% in 2008. That would be slower than 2006’s 2.7% but faster than the eurozone’s trend growth of just above 2%.

Inflation is forecast to be around 1.85% rising to close to 2% 2008.