ECB reinforces rate speculation

European Central Bank policymakers have reinforced expectations that they will raise interest rates next month, talking tough on inflation, a day after the bank shocked markets by flagging an April hike.

Executive board member Jose Manuel Gonzalez-Paramo said the ECB was ready to raise rates next month if the situation required, sticking to the line unexpectedly presented by the bank's president, Jean-Claude Trichet, a day earlier.

Mr Trichet's shock announcement yesterday that an ECB rate rise was possible next month sent further reverberations through financial markets on Friday, with the euro hitting a four-month high against the dollar. Asked whether the central bank was likely to raise rates in April, Gonzalez-Paramo said: "We will see when the time comes ... It depends on the actualisation on our assessment and the information we get in the next 30 days.

"But clearly the risks to inflation are on the upside and it is the mission of the ECB to prevent those from materialising, so we are ready," he told reporters in Cape Town after speaking at a conference.

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

A forward-looking indicator released by the Economic Cycle Research Institute today showed euro zone inflationary pressures hit a 28-month high in January.

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

The strong indication that a rise will come in April put the ECB in pole position to hike well before the US Federal Reserve and even the Bank of England, which analysts had expected to move first. The ECB focuses on headline inflation unlike the Fed, which looks more closely at core inflation - a measure that strips out volatile food and energy costs.

In Paris, ECB policymaker Lorenzo Bini Smaghi said strong growth in emerging markets would push up food and commodity prices permanently.

Policymakers have systematically underestimated inflation and overestimated growth in advanced economies, he added in comments that kept up the ECB's anti-inflation rhetoric and perhaps offered an oblique hint to the Fed.

Reuters