ECB signals further rise in interest rates early next month

Borrowing costs are likely to rise again early next month, the European Central Bank (ECB) warned unexpectedly yesterday

Borrowing costs are likely to rise again early next month, the European Central Bank (ECB) warned unexpectedly yesterday. Marc Coleman, Economics Editor, reports.

Signalling a quickening in the pace of interest rate increases, ECB president Jean-Claude Trichet announced that the ECB's rate-setting council would take the exceptional step of meeting in person in Frankfurt on August 3rd rather than by having their usual summer holiday tele-conference.

August meetings of the governing council have never before been used to change interest rates. "The various heads of Europe's central banks are not going to put their holidays on hold unless they intend to take action, so a hike now seems certain in the first week of August," Niall Dunne, financial strategist at Ulster Bank, said yesterday.

Analysts now expect that rates will jump by a further quarter of a percentage point at that meeting, the fourth rise in the current cycle since rates were first increased in December.

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This will add a further €34 to the monthly repayments of home-owners, with the cost of a typical mortgage of €250,000 over 25 years set to rise to €1,333.

Borrowers on a typical tracker rate of 3.85 per cent have already seen €100 added to monthly mortgage costs as interest rates rose by three-quarters of a percentage point since December.

Mr Dunne believes that yesterday's statements from Mr Trichet mean that rates will continue to rise ahead of previous expectations.

"Euribor futures now imply a 50 per cent probability that ECB base rates will rise to 4 per cent during 2007; prior to today's announcement, markets thought rates would rise no higher than 3.5 per cent next year."

The governing council yesterday left interest rates unchanged, having last increased its main refinancing facility by one-quarter of a percentage point, to 2.75 per cent, on June 8th.

However, Mr Trichet clearly signalled that the ECB is increasingly concerned by inflationary pressures in the euro zone caused by rising borrowing and house prices.

"A progressive withdrawal of monetary accommodation remains warranted. Against this background, we will exercise strong vigilance," he said yesterday. Reference to the words "strong vigilance" in Mr Trichet's press conferences were made in the run-up to previous rate increases last December, March and June.