European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month to fight accelerating inflation pressures.
An “increase of interest rates in the next meeting is possible,” told reporters in Frankfurt today after the central bank left its key rate at a record low of 1 percent. “Strong vigilance is warranted,” Trichet said, adding that any increase would not necessarily be the start of a “series” of moves.
Rising oil prices, which surged over $100 a barrel last week, and faster economic growth are fanning inflation which has already breached the ECB’s 2 percent limit for three straight months. At the same time, officials must weigh any rate increase against the risk it will exacerbate Europe’s sovereign debt crisis by tightening policy too soon.
The euro rose 0.9 percent after Trichet’s remarks, climbing to $1.3975, the highest since November. German government bonds, a benchmark for Europe, dropped, sending the yield on the two- year bund 18 basis points higher to 1.715 percent.
The ECB is “prepared to act in a firm and timely manner,” Trichet said.
Investors last week increased bets on the ECB raising rates as soon as August after policy makers including board member Juergen Stark said they will act if needed to prevent soaring commodity prices from driving up price expectations.
Henkel AG, a German maker of industrial and consumer chemical products, said on Feb. 24 it will raise prices in all businesses and all regions this year in response to rising raw material costs.
Political tensions in Libya, the latest country to experience a wave of anti-government protests in North Africa and the Middle East, pushed crude prices above $100 a barrel on Feb 23. Libya, which ships most of its crude and fuels to Europe, has cut oil production by more than half, the International Energy Agency said on Feb 25. Oil traded as high as $101.47 a barrel yesterday.
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