ECB signals interest rate rise

The European Central Bank (ECB) yesterday sent the clearest signal yet that its next interest rate move would be upwards as it glossed over the recent weakness of euro zone growth.

Speaking after the bank left its main interest rate unchanged at 2 per cent for the 21st consecutive month, Jean-Claude Trichet, ECB president, said "everyone knows" that rates would have to rise.

His comments came despite economic data in recent weeks highlighting the weakness of euro zone growth at last year's close and into 2005 as the region feels the effect of higher oil prices and a stronger euro. Some economists have even suggested the ECB should cut interest rates. Mr Trichet said a reduction had not been discussed.

Euro zone growth in the second half of 2004 had been "disappointing", Mr Trichet admitted, but figures for the year's final months had "offered some positive signs with regard to the underlying trend".

Consumption would pick up while still strong world economic growth would support exports.

Mr Trichet was also upbeat about efforts Germany had made to increase cost-competitiveness, saying "you can see in the exports that it pays off".

The ECB lowered its forecast for 2005 growth to a range with a mid-point of 1.6 per cent, compared with the 1.9 per cent forecast in December, but Mr Trichet said the downgrade reflected the weaker 2004 figures.

It expects an inflation rate this year of 1.9 per cent - within its price stability target of "below but close" to 2 per cent.

But Jacques Cailloux, economist at JP Morgan, said: "This is an institution which is looking for an opportunity to increase interest rates and the growth outlook will be key to tilting the balance and determining the timing."

Economists said the ECB's bias towards a rate increase, despite obvious economic weakness, followed rises at other central banks and concern about strong credit growth and soaring house prices in several euro zone countries.

"The ECB will use any given opportunity to raise rates given the fears over excess liquidity," said Niels-Henrik Sorensen, economist at Danske Bank.

The ECB's task has been made more difficult by clear differences between euro zone countries.

Germany has not seen a house price boom and its economy contracted by 0.2 per cent in the last quarter of 2004 - compared with 0.8 per cent increases in Spain and France.

- ( Financial Times service)