Tags: ECB | May | Raise | Rate | Again | July | Trichet

ECB May Raise Rate Again in July

Friday, 08 Apr 2011 10:21 AM

The European Central Bank will raise interest rates again in July as it battles to push inflation below its 2 percent ceiling, a survey of economists shows.

Policy makers will follow yesterday’s increase with 25 basis-point steps every three months, taking the benchmark rate to 1.5 percent in July and 1.75 percent in October, according to the median of 20 estimates in the Bloomberg News survey. The pattern will continue in 2012 with increases every quarter, so that the key rate reaches 2.75 percent before the end of next year, the survey shows.

ECB President Jean-Claude Trichet said yesterday that officials had not decided on a series of increases after lifting the benchmark from a record low of 1 percent, where it had been since May 2009. With inflation running at 2.6 percent and Germany’s economy booming, economists said the ECB has embarked on a gradual policy-tightening cycle.

“Trichet may have said that they haven’t made that decision, but he always says that,” said Nick Kounis, chief European economist at ABN Amro Bank NV in Amsterdam, who expects the next move in July. “They will continue to raise rates and it’s just a combination of factors that will drive it — the inflation outlook, the economic outlook and their desire to normalize policy.”

‘Cautious Start’

Silvio Peruzzo, euro-area economist at Royal Bank of Scotland Group Plc in London, said the ECB’s next move could come as soon as June.

“The phrase about the first step not being the beginning of a series is reminiscent of the start of the previous tightening cycle,” he said. “Trichet wants to signal a cautious start.”

When Trichet kicked off the last cycle of rate tightening in December 2005, he said that “we have not taken any ex-ante decision to embark on a series of interest-rate increases.” The central bank went on to lift its key rate from 2 percent to 4.25 percent by July 2008.

Trichet also said yesterday that officials are monitoring inflation risks “very closely,” a phrase that during the previous cycle signaled an interest-rate increase in two to three months’ time.

The ECB last month forecast inflation would average 2.3 percent this year and 1.7 percent in 2012. Since then, oil prices have surged to more than $111 a barrel.

ECB officials are worried that workers will demand higher wages in compensation for rising energy and food costs — so-called second-round effects that could entrench faster inflation.

“We’ve seen a cost push and monetary policy has to act preemptively,” ECB Executive Board member Gertrude Tumpel-Gugerell told reporters in Berlin today. “It’s important to avoid second-round effects now.”

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The European Central Bank will raise interest rates again in July as it battles to push inflation below its 2 percent ceiling, a survey of economists shows. Policy makers will follow yesterday s increase with 25 basis-point steps every three months, taking the benchmark...
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2011-21-08
Friday, 08 Apr 2011 10:21 AM
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