ECB officials say if interest rate rises it will be a one-off

A PLANNED rise in euro-zone interest rates next month will be a one-off warning shot not necessarily followed by further increases, European Central Bank (ECB) officials have indicated.

Comments by ECB governing council members yesterday sought to correct an impression in the financial markets that July’s expected increase would mark the resumption of a tightening cycle. The remarks pointed to nervousness at the bank that its hardline stance, which raised concerns in Washington, had been exaggerated.

Jean-Claude Trichet, ECB president, last week said a quarter percentage point rise in the main interest rate to 4.25 per cent was “possible” but not a certainty.

Christian Noyer, governor of the Bank of France, said he did “not see a clear link” between Mr Trichet’s comments and financial markets’ expectations that further rises would follow. Jürgen Stark, an ECB executive board member, had been even blunter, saying: “We are not talking about a series of rate increases.”

The ECB’s surprise comments last week followed its mounting concerns about the surge in euro-zone inflation – at a 16-year high of 3.6 per cent – which has been powered by soaring oil prices. It feared that, without pre-emptive action, expectations about future inflation rates would rise and become self-fulfilling.

Although yesterday’s comments were pitched at financial markets, they could help calm ruffled relations with US authorities. Mr Trichet’s words, which drove the euro higher, came two days after Ben Bernanke, US Federal Reserve chairman, joined the chorus of US voices worrying about the effects of the weakening dollar.

“This was extremely inconvenient for the Americans and I would be surprised if this was not said to [the ECB] in one way or another,” said Erik Nielsen at Goldman Sachs.

Yesterday’s clarifications made clear the ECB wanted to increase interest rates to send a signal about its inflation-fighting credentials but was worried about the turbulence it had unintentionally unleashed, said Julian Callow at Barclays Capital. “They had wanted to show that they were not standing idly by as inflation heads towards 4 per cent.”

The common stance taken by Mr Noyer and Mr Stark suggested divisions on the ECB’s governing council were not as great as they had seemed last week.

The similarity of their remarks suggested the council had made a deal whereby the “hawks” won an interest rate rise but without committing to more rises, said Gilles Moec at Bank of America. - (Financial Times service)