Rates may not have peaked - ECB

A recent change in European Central Bank (ECB) language on monetary policy does not mean that interest rates are near a peak, …

A recent change in European Central Bank (ECB) language on monetary policy does not mean that interest rates are near a peak, ECB Governing Council member Nicholas Garganas said in an interview published today.

It does not mean that we have reached what we would interpret as near the peak of the interest rate cycle
ECB Governing Council member Nicholas Garganas

The ECB changed its description of euro zone rates to "moderate" from "low" on March 8th when it raised borrowing costs to 3.5 per cent in its seventh quarter percentage point increase since December 2005.

But Mr Garganas played down the significance of the change. "Regarding your question about changing the wording from 'low' to 'moderate', it does not mean that we have reached what we would interpret as near the peak of the interest rate cycle," he was quoted as saying by news agency Market News International.

Most analysts think another increase to 4 per cent is likely by June, but financial markets appear more sceptical after recent market turbulence.

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The ECB does not have a benchmark level for interest rates in mind but would not hesitate to act should inflation risks seem likely to materialise, Mr Garganas said.

"As you know, we do not pre-commit to a particular interest rate path," he said. "We really have to wait and see how things will develop, and that is why we closely monitor developments."

Mr Garganas said that wage negotiations were the biggest risk factor for euro zone inflation, followed by the danger of further oil price increases. Soft economic indicators, such as survey data, confirmed the view that the euro zone's robust growth would continue around potential, bolstered by rising employment and very favourable financing conditions for corporate investment, he said.

"All of these help maintain a dynamic path for investment and bullish confidence," Mr Garganas said. "And all short-term indicators, soft data, really confirm this picture, even though we expect some smoothening of growth in the first quarter, as you know, because of the VAT increase in Germany," he said.

A slowdown in US growth to below its underlying potential would be compensated by stronger growth elsewhere in the world, ensuring that the euro zone would still benefit from demand for its exports, he added.

ECB staff forecast that the euro zone economy will grow around 2.5 per cent this year, followed by 2.4 per cent in 2008. That would be slower than 2006's 2.7 per cent but faster than the euro zone's trend growth of just above 2 per cent.

Inflation is seen at around 1.8 per cent this year, rising to about 2.0 per cent in 2008 as the effect of lower oil prices falls and spare capacity shrinks, taking price growth back above the ECB's target of just below 2 per cent.

In his March 8th news conference, ECB President Jean-Claude Trichet noted he had not described ECB rates as being at a peak.