ECB keeps options open on rate hike

EUROPEAN Central Bank president Jean-Claude Trichet kept the markets guessing yesterday about his interest rate intentions.

As expected, he declined to comment on whether the financial market turmoil is undermining the European economy, keeping his options open on interest rates until the bank’s council meets on September 6.

Speaking for the first time since the stock market turmoil started, Mr Trichet said the bank’s governing council would wait until its next meeting before taking a final decision about raising interest rates.

On August 2 the ECB, following its last council meeting, indicated rates would be raised at its September meeting.

The expected hike of 0.25% would push rates to 4.25%, putting further pressure on stretched mortgage holders who have seen rates rise by 2% since December 2005.

Speaking to reporters at an economic conference Mr Trichet said the assessment of the governing council on interest rates would be made on September 6.

“We will then all together have to assess all elements of European and global finance,” he said.

He insisted also that his August 2 announcement that ECB’s position on interest rates was one of “strong vigilance” did not commit the central bank to a rate hike next month.

Economists have been calling for the ECB not to raise rates due to the huge loss of confidence the world’s stock markets and the credit crunch backlash triggered by the subprime lending crisis in the US.

Despite the lack of clarity from the ECB, economists strongly believe the bank will hold rates at 4%.

Speaking prior to yesterday’s announcement Dan McLaughlin of Bank of Ireland said with US interest rates on the way down, rate hikes in Britain and Europe now looked unlikely.

The present credit crunch cannot be ignored because if sustained it would cause rates to rise globally at the retail level, he said.

Societe Generale said it expected rates to be held until March, but forecasted a full hike of 1% from the ECB between that date and the end of 2008.

Its London-based economist James Nixon who perviously worked with the ECB, said he believed the bank would keep rates on hold until next March, given the current tight credit circumstances affecting the markets.

Dermot O’Brien of NCB Stockbrokers said that holding rates made sense at this stage and failure to do so risked doing further damage to the global economy.

Commenting last Friday on ECB policy Mr O’Brien said a failure to hold rates at current levels risked making the ECB look “petulant and immature”.