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ECB's Rate Hike Likely to Bring Boos

Antonia Oprita,|Associate Web Producer
Thursday, 3 Jul 2008 | 6:49 AM ET

A petition to halt interest rate hikes in the euro zone notwithstanding, European Central Bank President Jean-Claude Trichet will in all likelihood boost interest rates when the policy makers meet Thursday.

Signatures at http://www.stoptrichet.com/ are piling up, but Trichet is adamant to prove the ECB will not be swayed in its fight against inflation, analysts told CNBC.

"I think it's quite clear they will increase (the rate)," Veronika Lammer, euro zone analyst at Erste Bank in Vienna, told CNBC.com. "They are afraid they could lose the confidence of the markets that they are able to keep inflation low."

Inflation hit another record high of 4 percent in the euro area in June, cementing expectations that the central bank will go ahead and raise its main, "refi" interest rate by a quarter point to 4.25 percent – a possibility announced at its meeting in June.

But those trying to persuade Trichet to give up the rate rise say monetary tightening would not contribute to keeping prices in check in the euro zone.

Quite the opposite, argues the initiator of the online petition, which has gathered more than 7,000 signatures.

"If the refi rate is raised, the euro may rise again, the dollar may fall again, and the price of a barrel (of crude) will rise again," says French economist Marc Touati, in a video explaining the reasons behind the petition. "There is the danger, in wanting to fight inflation by raising the rate, to actually fuel inflation."

Pressures Mount

French President Nicolas Sarkozy also spoke against the rate hike, demanding the ECB focus on economic growth as well as inflation, and this time German Finance Minister Peer Steinbrueck joined in, saying the ECB should consider the impact of its rate decisions on the zone's economies.

On Wednesday, three French Members of Parliament sent a letter to Trichet urging him to refrain from hiking the rate, saying the ECB's mission should also be to support growth.

And judging by the latest news on the economic front, the no-hike camp seems justified.

Confidence indicators released last week suggested the euro zone's economy was close to stagnation last month and is heading for further slowdown, while the manufacturing sector contracted in June for the first time in three years and there are signs unemployment might pick up.

Right before the ECB's decision, data showed a contraction in euro-zone services, with RBS/Markit Eurozone Purchasing Managers Index for services companies, ranging from banks to hotels, falling to 49.1 in June from 50.6 in May.

Of the four major economies of the euro zone, only the German and French services sectors grew in June, according to the data.

But the weakness is caused by the effects of higher inflation on consumption, some analysts argue, which makes people cut down on things such as durable goods to make room for the essentials.

The inflation rate is imported and high energy and food prices start to impact other prices, unlike in previous episodes of high inflation, caused by overheated economies, and which cooled down when the economies slowed, Standard & Poor's economist Jean-Michel Six told "Power Lunch Europe."

"We are at the mercy of emerging markets exporting inflation to our economies," Six said.

And despite Trichet's denial that a series of rate hikes may be in the cards, fewer analysts believe that the July rise will be "one and done".

"The inflation threat will stay in the market," Lammer said. "I would see a further hike next year."

Contact Europe: Economy

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