ECB to signal June interest rate rise

THE European Central Bank (ECB) is expectedto prepare the grounds for another interest rate rise next month at its monthly meeting, which takes place in Dublin today.

There is little prospect of ECB chiefs springing an interest rate hike today but president Jean Claude Trichet will use the opportunity to signal a 0.25% increase in borrowing costs at its June 6 meeting. That increase will be the eighth in 18 months and leave rates at a five-year high of 4%.

The ECB’s meeting in Dublin is just the second time it has met in Ireland, the last being June 2001.

The eurozone’s economic picture has changed since then. Growth in Europe’s main economies was negligible and the euro was hitting lows against the dollar.

Today, ECB governors face growth rates and confidence levels not seen in years in countries like Germany, while the euro is high against the dollar and yen. That puts the bank under pressure to ensure eurozone inflation does not exceed its 2% target. Consumer prices across the 13 nations using the currency have edged nearer 2% and the bank is concerned pay rises to workers are not helping its attempts to sooth inflation.

Some economists expect the ECB to keep rates at 4% for the rest of the year, though pressure on the inflation front, which is not being helped by a rise in oil prices over the past month, could force it to act again before the year is over.

IIB chief economist Austin Hughes says it is not certain the ECB will go above 4% this year even if the positive economic environment continues.

“If eurozone economic activity remains as hot as many forecasts envisage, it seems likely the ECB would raise official interest rates again in the autumn of 2007 and further rate increases could not be ruled out if growth were to remain as strong as this for the remainder of 2007 and into 2008.”

But he said signs consumer confidence is easing “could translate into a softer growth trajectory for the eurozone as 2007 progresses”.