ECB signals rate rise before Christmas

Homeowners face a rise in mortgage rates for the first time in more than two years after European Central Bank president Jean-Claude Trichet gave an unequivocal signal yesterday that euro-zone interest rates would rise before Christmas.

Speaking at a banking conference in Frankfurt, Mr Trichet said: "After two and a half years of maintaining historically low interest rates, I consider that the governing council is ready to take a decision on interest rates."

The ECB has not raised rates for five years and has left them unchanged at 2 per cent since June 2003. His comments pushed the euro up sharply and sent government bond prices tumbling.

Economists said it was now certain that there would be a rate rise of at least 25 basis points, to 2.25 per cent, on December 1st. For mortgage borrowers, many of whom are now on tracker rates, the move will prove an unwelcome Christmas present.

Mr Trichet also said the council was ready to "moderately augment the present level of intervention rates in order to take into account the level of risks to price stability that have been identified".

That persuaded analysts that a 50-basis-point rise was unlikely. Futures markets were betting yesterday that an initial increase in December would be followed by two more - to 2.75 per cent - by next summer.

The surprise declaration - during a sleepy conference panel discussion with prominent German bankers - came in the wake of weeks of hawkish signals from some of the more outspoken members of the ECB's governing council and one day after a "non-policy" meeting of the council.

Economists welcomed the clarity of the statement and said Mr Trichet had reasserted his authority over the bank.

Julian Callow at Barclays Capital said: "This has cleared the air. Very correctly, they have decided it's important to be speaking with one voice here."

There has been a growing body of economic data to support proponents of a rate increase in recent weeks.

But the decision to raise rates will put Mr Trichet on a collision course with many European governments, which have long argued such a move risks strangling nascent economic growth.

Euro-zone finance ministers, led by Luxembourg prime minister Jean-Claude Juncker, pledged to argue against a rate rise at the ECB's December 1st meeting.

The International Monetary Fund was also critical. Rodrigo Rato, managing director of the International Monetary Fund, said: "There is no reason to consider monetary conditions restrictive." - (Financial Times service)