ECB

Trichet says ECB rate rise possible in April

Reuters News
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Posted: Mar 22, 2011 10:07 AM

By Marc Jones

FRANKFURT (Reuters) - The European Central Bank may hike interest rates next month, far earlier than markets expected, though any rise would not signal the start of a series of increases, President Jean-Claude Trichet said on Thursday.

Trichet dismissed the idea that a rate rise in April could be bigger than 25 basis points, saying that such a scenario was "not the appropriate interpretation."

"The position of the Governing Council is that an increase in interest rates at the next meeting is possible," he told a news conference after the central bank left rates at a record low 1.0 percent.

Asked whether a potential rate rise in April would signal the start of a round of hikes, he added: "It is certainly not the sense of the start of a series of rate hike increases."

The euro soared as Trichet spoke, piercing resistance around $1.3958, its 200-week moving average, to hit as high as $1.3976, its strongest since November 8, putting it on track to test the psychologically important $1.40 level.

"In a similar fashion to 2008, the ECB has pre-announced a rate hike for its next policy meeting," said Jacques Cailloux at RBS European economics. "This is a shock to us relative to our earlier expectation of an ECB remaining on hold till September."

Trichet said the ECB would exercise "strong vigilance" over rising inflation, deploying a phrase that in the past signaled a rate rise was only a month away.

"Strong vigilance is warranted with a view to containing upside risks to price stability," he said.

The ECB used the phrase repeatedly during its 2005-2007 rate hike cycle, typically one month before it raised rates, although there were exceptions to that rule. Trichet said an April rate rise was not certain but sounded notably hawkish.

"When we have a shock -- and we have a shock -- our responsibility is to prevent a second round of effects (from high oil prices)," he said.

In his opening statement, he also pointedly did not say that rates were at an appropriate level.

Euro zone inflation accelerated to 2.4 percent last month, moving further above the ECB's target of just below 2 percent.

In a fresh set of forecasts, ECB staff forecast euro zone inflation would overshoot the central bank's target this year, but to fall back to below the 2 percent upper limit in 2012.

Trichet said staff expected inflation to be 2.0-2.6 percent in 2011 -- giving a midpoint of 2.3 percent -- and between 1.0 and 2.4 percent in 2012.

LIQUIDITY UNCAPPED

Trichet also said the central bank would carry on providing unlimited funding for banks at its three-month operations for the next three months and would keep full allotment at its weekly and one-month operations, until at least July 12.

A Reuters poll on Tuesday showed money market experts were evenly split over whether the ECB would restart the process of withdrawing its crisis support or wait a little longer.

The ECB faces accelerating inflation but its readiness to restart its 'exit strategy' from bank support measures may be limited by doubts about whether EU leaders will agree later this month to bolster Europe's rescue fund.

The same does not seem to apply to monetary policy.

Should EU leaders fail to come up with a comprehensive package to tackle the euro zone's sovereign debt crisis at their March 24/25 summit, markets could turn more negative on the bloc's peripheral countries, further delaying the central bank's exit from crisis liquidity measures.

German resistance to boosting the rescue fund has heightened uncertainty about the summit outcome.

Trichet has called for European leaders to give the rescue fund, the European Financial Stability Facility (EFSF), maximum flexibility in both size and scope.

"It's increasingly clear that on March 25 we'll have some kind of result but probably not the comprehensive solution that was hoped for," said Deutsche Bank economist Gilles Moec.

The ECB's head of market operations Francesco Papadia said earlier on Thursday money markets were polarized, with banks in the periphery still dependent on the ECB for liquidity.

(Editing by Mike Peacock)