Trichet dashes hopes for early interest rate cut

EUROPEAN and British central bankers left their key interest rates unchanged following their monthly meetings.

ECB president Jean Claude Trichet said “the risks to the outlook for inflation over the medium term are on the upside” dashing hopes of an early interest rate cut.

Simon Barry, economist with Ulster Bank, warned those expecting cuts from the ECB this year may be disappointed.

Forecasts for inflation have been marked up significantly, and by more than had been expected, reflecting the increases in food and energy prices in recent months, he said.

Asked about expectations in financial markets for rate cuts later this year, Trichet responded that the bank was “not underwriting market rate expectations”, distancing the ECB from the notion that the bank may be about to embark on a cycle of rate cuts, said Mr Barry.

The ECB remains very much on hold, with a softer and highly uncertain growth outlook offset by concerns about the strength of inflation pressures, he said.

“Our base case remains that the ECB will leave rates unchanged this year.”

The latest forecast for average inflation in 2008 now stands at 2.9%, considerably higher than the 2.5% pencilled in last December. And underlining the deterioration in the inflation outlook was the forecast for inflation in 2009 which now stands at 2.1%, up from 1.8%.

Trichet confirmed that inflation at 3.2% in February 2008 was unchanged from January.

Other economists still expect the bank will be forced however, to cut rates later this year as the impact of recession in the US undermines global growth.

Austin Hughes, chief economist at IIB Bank said in a year-end comment that he thought Trichet was bluffing about a rates cut and said that “ultimately, the key question in terms of the outlook for Euro area rates depends on the extent to which global economic activity slows and the degree to which the euro zone economy can withstand this downswing”.

“We still reckon this shift is likely to occur reasonably early in 2008. As a result, we remain of the view that ECB policy rates will fall to 3.5% by next Summer,” Mr Hughes said.

William de Vijlder, chief investment officer, Fortis Investments, said in Dublin on Monday the ECB could cut rates by 0.75% by year-end in response to the growing slow-down in the economy.