Trichet Pledges `Vigilance,' Signals Rate Increase

Trichet Pledges `Vigilance,' Signals Rate Increase

http://www.bloomberg.com/apps/news?pid=20601092&sid=aZuvyJS_bM7k&refer=italy

By Gabi Thesing and Christian Vits


Jean-Claude Trichet, president of the ECB Aug. 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled the bank is ready to raise its benchmark interest rate from a six-year high in September after leaving it unchanged at 4 percent today.

``Strong vigilance'' is needed to ensure inflation risks don't materialize, Trichet said at a press briefing in Frankfurt, language he's used to signal each of the bank's eight rate increases since late 2005. ``Rising oil prices, emerging capacity constraints and the potential for stronger wage dynamics imply upside risks to price stability.''

The ECB says it must contain inflation as the economy of the 13 nations using the euro expands at close to the fastest pace since 2000. While financial-market turmoil over the past week prompted some investors to trim bets on rate increases, many economists expect the ECB to move twice more this year.

Trichet urged investors to keep their composure after the market rout. Nevertheless, ``we think that this evolution in financial markets deserves attention and we will continue to observe'' and give ``great attention'' to this, he said.

The ECB will raise its key rate to 4.25 percent in September, a Bloomberg survey of economists shows.

Investors' Expectations

Trichet's comments cemented investors' expectations for one more increase this year and prompted some to raise bets on a second. The implied rate on the three-month Euribor futures contract for December settlement was at 4.52 percent at 4:07 p.m., up four points from yesterday's close. The euro was little changed at $1.3667.

``Post-September, the ECB is taking care to leave all options open,'' said Howard Archer, chief European economist at Global Insight Inc. in London. ``We still lean toward the view that the ECB will lift interest rates to 4.5 percent by the end of the year.''

The Bank of England kept its key rate at 5.75 percent today, a six-year high. Central banks around the world are raising rates to tackle the threat of accelerating inflation.

New Zealand's Reserve Bank on July 26 increased its key rate to a record 8.25 percent and the Bank of Canada raised its benchmark on July 10.

The Bank of Japan may move its rate up a quarter-point to 0.75 percent this quarter, a survey of economists shows. By contrast, the U.S. Federal Reserve has kept its benchmark at 5.25 percent for a year as economic growth slowed.

Raised Forecast

The ECB in June increased its 2007 growth forecast for the euro region to about 2.6 percent from 2.5 percent and, according to council member Nicholas Garganas, may raise it again in September. In 2006, the economy expanded 2.7 percent, the most since the turn of the decade.

While inflation has held below the ECB's 2 percent ceiling for 11 straight months, the bank expects an acceleration beyond its comfort zone later this year.

Oil prices have surged 52 percent since mid-January and the euro region's jobless rate stayed at 6.9 percent in June, the lowest since records began in 1993.

Higher energy prices and falling unemployment have prompted trade unions to push for wage increases. Germany's IG Metall, the country's largest union, in May won a 4.1 percent raise for 800,000 workers in the metals industry.

Adding to the ECB's concern, money-supply growth, which the bank uses as a gauge of future inflation, accelerated to close to the fastest pace in 24 years in June.

Still, the market rout raised concern that economic growth will slow, lessening the need for higher central bank rates. Europe's Dow Jones Stoxx 600 Index has dropped 5 percent in the past two weeks after subprime mortgage defaults in the U.S. and hedge-fund losses increased risk aversion among investors.

The ECB ``clearly intends to hike in September, assuming nothing big happens,'' said David Page, an economist at Investec Securities in London. ``We expect that to be the peak.''