Trichet may delay rate rise until June

The European Central Bank (ECB) left interest rates unchanged at 2

The European Central Bank (ECB) left interest rates unchanged at 2.5 per cent yesterday and surprised analysts by indicating that the next rate rise might take place later than expected. Marc Coleman, Economics Editor, reports.

ECB president Jean-Claude Trichet hinted strongly that interest rates would rise in June, rather than in May as had been expected by financial market analysts. Speaking in the wake of yesterday's meeting, Mr Trichet appeared to tone down earlier hawkish rhetoric and said there was no consensus on the council to raise rates in May.

But analysts have interpreted the move as a play for time, rather than a softening, and predicted yesterday that rates would climb by a further three-quarters of a percentage point by the end of this year.

In the press statement following the governing council's monthly rate-setting meeting, Mr Trichet did not use the word "vigilance" to describe the bank's attitude to inflation. The term was used on no less than three occasions in the February statement, which preceded a decision to raise rates in March.

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Speaking to reporters after the meeting, Mr Trichet also downplayed expectations for a rate hike when the governing council next meets in May. "The present high probability which is given for an increase in rates in advance of the next meeting does not correspond to the message of the governing council," he said.

But in a subtle reference to the June meeting of the governing council, Mr Trichet suggested that rates could increase then. "The sentiment which I see from time to time in some remarks of market literature that we do not increase rates when we are out of Frankfurt is equally not at all the sentiment of the governing council".

While most ECB governing council meetings occur in Frankfurt, the meeting scheduled for next June will take place in Madrid. Austin Hughes, chief economist of Irish Intercontinental Bank (IIB), said that in choosing this language Mr Trichet was not signalling a weakening of the ECB's tightening policy, but merely conveying that it would be implemented gradually rather than suddenly.

"In the coded language favoured by central bankers, this wording implies that rates will move higher. We see rates rising in the next month or two, again in late August and once more later in the year to end the year at 3.25 per cent," he said.

Mr Hughes added that euro-zone inflation was benefiting from the strength of the euro. "The recent surge in the euro on foreign exchange markets may have played a significant part in Mr Trichet's less hawkish comments today."

"It's a surprise, because it contrasts with the latest run of data," said Rainer Gunterman, economist with Dresdner Kleinwort Wasserstein. "The ECB either wants to pursue a gradual series of interest rate increases in general and isn't ready to up the pace, or the other possibility is that the council is divided."