Brussels, 08/03/2007 (Agence Europe) - It came as no surprise when the European Central Bank (ECB) decided, on Thursday, to raise interest rates in the eurozone by 25 base points, taking the minimum tender rate applied to refinancing operations to 3.75%, the rate of interest for the marginal lending rate to 4.75% and that of the deposit facility to 2.75%. These operations will take effect on 14 March 2007. This is the seventh time that the ECB has raised interest rates since December 2005 and the rhetoric of the ECB president, Jean-Claude Trichet, is well practised, although one can see some developments.
After the meeting of the Governing Council, attended by the German finance minister, Peer Steinbrück, and the commissioner for economic and monetary affairs, Joaquin Almunia, Mr Trichet spoke of the “upward risks for medium term price stability”. In a favourable economic context, with vigorous growth of credit and abundant liquidity within the eurozone, monetary policy remains “accommodating”, he stressed, pointing out that the ECB will be closely monitoring the situation. However, while eurozone rates were still described as “low” after the meeting in February, they are now considered “moderate”, Mr Trichet says, nonetheless refusing to specify whether they had reached a peak. The change in terminology may suggest that the conditions are in sight for putting an end to monetary austerity begun in December 2005, but that they have not yet been met. “If I was preparing the market for more restrictive intervention, I would have said so”, Mr Trichet explained, commenting that “it will remain necessary to act firmly and in an appropriate manner in order to ensure price stability”.
The growth results during the fourth quarter 2006 (0.9% in the eurozone) exceed all expectations, reflecting that there is still “robust” economic activity in the eurozone. This augurs well for favourable medium-term forecasts, not only from the point of view of exports, but also for internal demand and investment, so that ECB services have reviewed their forecasts upward compared to December figures. Growth could thus settle at between 2.1% and 2.9% in 2007 and between 1.9% and 2.9% in 2008. Largely balanced in the short term, risks are still mainly falling in the longer term, due to oil prices, protectionist measures and global imbalance.
The rates of inflation should fall in spring and summer before rising again towards the end of the year to then stabilise around 2% again, Mr Trichet estimated, presenting the forecasts established by his services, which are counting on a price level of between 1.5% and 2.1% in 2007 and between 1.4% and 2.6% in 2008. The ceiling for the current year is considerably lower than before while the range for next year has increased slightly. In the medium term, risks for price developments point to being on the rise, Mr Trichet said, stressing that the agreements on salaries take into account not only the level of price competitiveness but also the still high rate of unemployment in several economies and the development of productivity. The Governing Council went on to take a close look at future salary negotiations. Risks are also on the rise on the monetary front, with annual growth of the monetary mass, M3, still at its highest level since the euro was introduced in 1999 (9.8%), and strong credit facilities.
Although, for the ECB, it is important to avoid second round effects, others believe that the current scenario does not justify its overzealousness when it comes to rates. In a press release published after the ECB decision, Eurochambres considers there is “no imminent danger to stabilising wage settlements”, and its president, Pierre Simon, calls on the ECB to “give equal attention to growth and employment”. (ab)