Brussels, 05/10/2006 (Agence Europe) - Meeting in Paris, the executive board of the European Central
Bank (ECB) increased Euro zone interest rates on Thursday by 25 base points. The minimum bid rate applied to main refinancing operations is therefore around 3.25%, the interest rate for lending facilities goes to 4.25% and the deposit facility rate jumps to 2.25%. These changes will become effective as from 11 October 2006. Although the scale of the rise remains the same as that experienced since December 2005, today's decision confirms a certain speeding up in the pace of a monetary tightening up, which since last August's intervention, has occurred every two months instead of three. Although the status quo prevailed in September (EUROPE 9227), the market now expects a new increase in December.
At the end of a meeting he was chairing, attended by Jean-Claude Juncker and Joaquin Almunia, Jean-Claude Trichet explained that “We are not making a medium term commitment and the market can set out its own forecasts”. He pointed out that if the economic recovery and risks of inflation were likely to remain, “the continuation of an adjustment in the accommodating orientation to the policy remains justified”. Although analysts are now looking for signs for 2007, the president of the ECB refused to make any comment, repeating the fact that decisions were not pre-determined. He stressed to the press that “annual inflation rates were expected to remain high in 2006 and 2007 and risks were clearly upward”. Although it had fallen back to 1.8% in September as opposed to 2.3% in August, “overall inflation is expected to move upwards towards the end of the year, beginning of 2007” and remain high, beyond an average of 2%, he observed, before warning that “wage rises that are higher than expected constitute a substantial upward risk for price stability”. Uncertainty regarding future energy prices and the repercussions of previous rises also risk having an effect that would mean the ECB therefore continuing to “monitor very closely” the development of these perspectives in a context of strong growth in money supply, credit and cash flow in the Euro zone. Today's rise was approved by an overwhelming majority of members of the executive board, which, Mr Trichet, reassured, had ruled out a hike of fifty base points.
As for growth, quarterly rises have been established at an average of 0.7% over the last four quarters and Mr Trichet thinks that “economic recovery appears to be relatively solid”. Resting on a much wider base, growth is mainly underpinned by internal demand and is expected to continue at a level close to its potential. A certain volatility, however, is likely to affect quarterly rates over the year due particularly to the increase in VAT in Germany. Although they remain balanced in the near future, “in the longer term, risks to growth remain downward” given the price for oil and global imbalances, explained Trichet, who also mentioned the “ very significant risk of confirmed protectionist pressures which could materialise and could be very negative to growth”. The same for a slow down in US business activity? In the event of a variation in growth of more or less 0.5% in the US, certain commentators say that the impact in Europe could be between 0.2%, indicated Trichet, who also pointed out that from a trade standpoint, the Euro zone remains more influenced by the United Kingdom and Europe “possesses considerable” market share in oil exporting countries.
He pointed out to those asking about the benefits of the new rises that although at the time of the first rises in rates, many pundits thought that “we didn't have an argument backing this but a posteriori all our decisions have been borne out and analysts have” begun to concur more with each other. Mr Trichet hammered home the fact that, “We always have exceptionally low long term interest rates in sight” both in Europe and worldwide and “when we think that monetary policy is no longer accommodating, we will say so”. (ab)