Trichet warns of ‘possible’ rise in rates

THE European Central Bank (ECB) president yesterday said a rise in eurozone interest rates was “possible” at its next policy meeting in April.

Jean-Claude Trichet said the ECB was “in a posture of strong vigilance” against higher inflation and left the markets in no doubt about the current mood within the ECB.

Speaking after the bank’s monthly interest rate meeting, he said the rate-setting committee may have to act in the light of recent “price shocks” due to the sharp rises in commodity prices.

Yesterday, the ECB held rates at 1%, maintaining a 22-month historic low.

Mr Trichet dismissed the idea that a rate rise in April could be bigger than 0.25%, saying that such a scenario was “not the appropriate interpretation”. But an increase next month was “possible, but not certain”.

No decision has been taken as yet, but he added the threat of rising inflation is causing major concerns for the eurocrats.

He stressed that the bank never takes a decision in advance, saying “we are never pre-committed”.

“The decision will be taken at the next meeting by the governing council,” he said.

After his comments, analysts agreed the threat of a hike in April was very real given the strength of what he had said.

Jacques Cailloux of RBS European Economics said that the ECB appeared to have “pre-announced” the increase apart from giving the size of the hike.

Mr Trichet said the ECB may need to act to prevent “secondary effects” from the current inflation shock sweeping the 17-nation eurozone.

Joan Henry, head of research at Savills Ireland, welcomed the fact that the ECB has kept rates on hold for at least another month.

However, she said that Mr Trichet’s comments on the need for increased vigilance regarding “inflationary pressures” was bad news however, for Irish homeowners and for the wider property market.

“The upward pressure on oil prices, particularly since the beginning of January will undoubtedly put increased pressure on inflation in the eurozone which is already above the ECB’s key inflation target rate of 2%.”

His use of the word “paramount” when stating how important it is that second round inflationary pressures, such as wage inflation, be prevented, indicates that the risks are very much on the upside in relation to the historically low base rate of 1%, she said.

“Expectations now will be that a 0.25% increase is on the cards” with that to be followed by a “possible further 0.25% by Q1 2012.”

With an increase in the ECB interest rate now possible as early as next month, PIBA, the country’s largest group of independent mortgage and insurance brokers, said: “Whether it happens next month or shortly after that there is little doubt but that it will be the beginning of a series of rate rises from the current low of 1%.”

Rachel Doyle, director of PIBA mortgage services, said: “The horizon is marked only with rate increases. We have seen a plethora of increases from Irish lenders in recent weeks.”