Trichet rules out interest rate rise

THE EUROPEAN Central Bank has ruled out a further interest rate increase in June but could raise official borrowing costs later this summer in its battle against surging euro zone inflation, the bank’s president has indicated.

In comments that sent the euro sharply lower, Jean-Claude Trichet signalled yesterday that the pace of interest rate increases in the 17-country euro zone would not be as rapid as some analysts had expected.

His comments hinted at ECB caution after it stole a lead over the US Federal Reserve and Bank of England last month by starting to tighten monetary policy. The ECB council met just hours after the unveiling of a bailout plan for Portugal – the third euro zone country to require outside aid.

Mr Trichet kept the ECB’s hardline inflation-fighting credentials intact by making no attempt to stop financial markets pricing in another quarter percentage point rise to 1.5 per cent in July.

“Being the first big central bank to increase rates, I don’t think . . . we have any credibility problem,” Mr Trichet said at a press conference in Helsinki, Finland. He did not, however, refer to a need for the ECB to maintain “strong vigilance” – bank code for an increase next month.

Mr Trichet said the weakness of euro-zone “periphery” countries such as Portugal had “absolutely not” been a factor in its decision to delay a possible interest rate increase.

The ECB, which is confident that the larger euro zone economic recovery will continue, believes last month’s interest rate increase sent a powerful signal that higher inflation caused by soaring oil and commodity prices should not become entrenched through wage and other costs.

The euro, which on Wednesday hit a 17-month peak of $1.4939 against the dollar, fell 1.5 per cent to $1.4598 by midday in New York. The euro retreated from a 13-month peak of £0.9042 against the pound, falling 1 per cent to £0.8896, and dropped 2.3 per cent to Y116.74 against the yen.

Waiting until July for the next move would allow the ECB to monitor the results of planned European bank “stress tests” and take into account revised euro zone inflation and growth forecasts.

“The ECB is clearly concerned not to overcook the tightening,” said Julian Callow at Barclays Capital.

Mr Trichet also quashed the idea, floated by Jens Weidmann, Germany’s new Bundesbank president, that the ECB had a mission to “normalise” interest rates by bringing them closer to pre-crisis levels even when there was no immediate inflation threat.

“I have never used that word. I don’t think at all that we have a policy of normalisation,” he said.

Euro zone inflation hit 2.8 per cent in April, above the ECB’s 2 per cent target. – (Copyright The Financial Times Limited 2011)