Eurozone rates up and more rises likely

Jean-Claude Trichet, the European Central Bank’s President, primed financial markets for further increases in eurozone interest rates yesterday as the ECB pressed ahead with another quarter-point rate rise.

The latest increase in eurozone borrowing costs marked a doubling of rates in the 13-nation bloc in 18 months and lifted them to their highest levels since before the September 11 terrorist strikes against the United States in 2001.

Despite this tough campaign of tightening by the Frankfurt-based central bank, Mr Trichet left economists in little doubt that the ECB intends a further turning of the monetary screws. At a press conference, he insisted that the present level of eurozone rates leaves the bloc’s monetary policy “still on the accommodative side”, even after yesterday’s move.

That assessment, which comes in spite of most analysts’ view that 4 per cent interest rates are close to a “neutral” level for the eurozone economy – neither boosting nor braking growth – was taken as a signal that the ECB believes it has more work still to do.

“Judging by Trichet’s broadsides at the press conference, the tightening bias is still intact, and the higher rates are still implied. Trichet’s tenor remains hawkish,” David Brown, of Bear Stearns, said.

Many economists believe that the ECB will now raise rates again in both September and December.

The only softer note from the ECB yesterday came in new economic forecasts that showed eurozone inflation retreating a little next year. It now expects inflation in a 1.4 to 2.6 per cent range in 2008, giving a mid-point of 1.9 per cent, in line with the bank’s target. However, it still lifted its inflation forecasts for this year.
Source : http://business.timesonline.co.uk