Brussels, 28/11/2005 (Agence Europe) - After two and a half years of stability in euro zone rates, the European Central Bank (ECB) is to take a decision this week to increase its principal reference rate. The Council of Governors, which is due to meet next Thursday, is expected to announce an increase of a quarter of a percentage point for the refinancing rate, which had been maintained at 2% since 5 June 2003. The ECB has been gradually preparing to tighten up its monetary policy since its meeting in Athens, but its president, Jean-Claude Trichet, does not see this as the beginning of a cycle of successive upward adjustments. Explaining to the European Parliament last week that the Council of Governors was "prepared to take a decision to increase the level of rates moderately", Mr Trichet nonetheless stressed that it " would not be an accurate hypothesis to consider, ex-ante, that we are starting off on a series of increases" (EUROPE 9072).
Announcing that the ECB would also review its inflation forecasts upwards, Mr Trichet further justified the need for a monetary adjustment to respond to the risks taking shape for price stability. Two elements are pushing the ECB to act: firstly, the level of inflation (2.5%), which is considerably higher than the ECB's definition of 2% a year, and secondly the high level of cash in the euro zone and the pace of credit, which is pushing real estate prices upwards in certain countries. It is difficult, in these conditions, to imagine that the ECB could do otherwise than decide, on 1 December, what it feels is necessary to fulfil its mandate, even if the time chosen for such an increase may not seem appropriate to a number of European politicians. Concerned about the repercussions for growth in the euro zone, which is taking off again but still remains fragile, they cannot see the justification to put the brakes on in this way, and feel that this is inappropriate. The second-round effects on salaries are not making themselves felt and the underlying inflation (not including energy, tobacco, alcohol and food) stands at just 1.5%, the ministers of the euro zone and Commissioner Almunia have stressed on several occasions. In view of the ECB on the other hand, it is the overall level of inflation which counts; furthermore, it believes that oil prices will remain high for some time. "The impact of energy prices on global prices is likely to last for longer than has been the case in the past", Mr Trichet told the Parliamentary committee on economic and monetary affairs.
In interview published by Le Figaro on 28 November, Jean-Claude Juncker puts forward the views of the Eurogroup, which he chairs, without questioning the independence of the ECB. "Within the Eurogroup, we feel that this increase in rates is not necessary", he said, explaining that "we have not observed a resurgence of inflation, nor any second-round effects, which means that wage restraint is predominant and that wage levels have not been affected by the increase in oil prices". It is not yet time for an increase, because "we are facing a lack of consumer confidence and if we were to sound the monetary alarm signal today, this would run the risk of eroding this confidence yet further and may appear premature", Mr Juncker explained. He added that although the ECB is unable to resolve this confidence problem, "it nonetheless shares a proportion of the responsibility". In any case, "let us not dramatise this conflict", because "it should not come as a surprise that I am not delighted at the prospect of such an operation", stressed Mr Juncker, who is waiting to see the results of an increase in the rates. Then, "if the ECB manages to persuade us that increasing the rate will have an imperceptible impact on growth, we will not criticise its decision, and if the contrary is true, we will have our say", he announced. Stressing that the ECB "has, until now, conducted an appropriate monetary policy", Mr Juncker points out that he has "always been concerned to maintain the independence of the Bank", particularly when he "spoke out in favour of its status at recent negotiations on the European Constitution". The ECB principal objective remains price stability, but we must "also take account of the economic policies of the euro zone", warns Mr Juncker, stressing the importance of the "useful" but occasionally "controversial" dialogue between the Bank and the Eurogroup.