BoI: 0.25% rate hike in April possible

AN ECB interest rate hike of 0.25% in April is a distinct possibility while the money markets have priced in two further increases before the year end.

In its latest bulletin, Bank of Ireland accepts ECB rates are on the way up given they have been at historic lows for so long.

But its chief economist Dan McLaughlin, questions whether the ECB will make three rate changes of 0.25% as the markets are currently saying.

In his view the implications for global growth due to the spike in oil prices could undermine weak European growth and force the bank to stay its hand.

That view was contradicted yesterday by Axel Weber, a member of the ECB governing council, who said he did not feel the need to disagree with market expectations that the ECB may impose three rate rises each of 0.25% before the year end.

“I wouldn’t do anything here to try to correct market expectations at this point,” Mr Weber told Bloomberg News in Frankfurt when asked about the market’s view that ECB rates will rise 0.75% to 1.75% by end 2011.

“I see no reason at this stage to signal any dissent with how markets priced future policies.”

The change will bring to an end the historic low interest rate regime of 1%, in place for the past 22 months.

The shift in the ECB’s stance at its recent interest rate meeting has been the catalysts for the change in market sentiment, Mr McLaughlin said. The markets have overdone their reaction to the ECB president’s warning that a rate hike is close to happening.

While the ECB is likely to impose a 0.25% rate within months, he says it is questionable if the other hikes will be introduced.

In his view, the threat of lower EU growth rates cannot be ruled out given the sharp rise in oil prices that tend to undermine economic growth rather than fuel inflation in the longer term.

Also the US central bank targets inflation excluding food and energy and tends to see higher oil prices “as negative for economic growth.” But the ECB gets “nervous” once its inflation target has been breached for whatever reason, he said.

On that basis “it is clear that barring some unexpected developments, the ECB is likely to raise rates fairly soon.”

Given the implicit threat to growth from dearer oil, Mr McLaughlin has described the timing of the announcement as “curious”.

Analysts are arguing that global growth will slow if oil prices stay at the current level or go higher, he said.

Given those obvious threat to growth “we are not convinced that the ECB will deliver the scale of rate increases priced in by the market, particularly as the sovereign debt problems within the euro area have not gone away,” Mr McLaughlin said.