Europe Economy

Euro-zone Rates Likely to Raise Further


Euro-zone interest rates have further to rise, European Central Bank Governing Council member Axel Weber said on Friday, although other policymakers stressed no move is imminent given uncertainty over the credit crunch.

Weber's comments are the strongest sign yet the ECB may push ahead with higher interest rates once current market turbulence abates, after the central bank held off with a rate rise on Thursday and left benchmark rates unchanged at 4%.

ECB President Jean-Claude Trichet said the ECB is constantly alert, underscoring the central bank's readiness to act once it has waited out the period of uncertainty generated by the sudden tightening of market liquidity.

FILES - Picture taken 06 June 2007 shows a man walking past the European Central Bank (ECB) in Frankfurt/M. western Germany. The European Central Bank 14 August 2007 injected 7.7 billion euros (10.5 billion dollars) into the money market to calm liquidity fears in the wake of the crisis in the US home loan sector.

Weber took Trichet's comments one step further. "We said we are in a process of adjusting interest rates. I have said that this process is not over," he told reporters on the sidelines of an ECB watchers conference.

"You can sum it up with the phrase: postponed is not abandoned."

Economists generally expect the ECB to leave rates on hold again in October and a narrow majority expect it to raise rates to 4.25% by year's end. Before the August credit crisis, many had seen rates hitting 4.5 % by December.

Other ECB policymakers speaking on Friday pointed to persistent inflation dangers although they said the ECB was waiting for more information before making any change to policy.

ECB Not Rushed

Executive Board member Lorenzo Bini Smaghi said the ECB would see more data in a few weeks and decisions depended on how the economy coped with the market turmoil. Trichet, for his part, made it clear the ECB was not in a rush.

"Given this high level of uncertainty, it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy," Trichet said at the Center for Financial Studies conference.

"That being said, our 'constant steady alertness' and determination to act in the future whenever it is necessary makes no doubt in the minds of observers."

Weber and ECB Vice President Lucas Papademos said the prospects for growth in the 13-nation region remained solid. ECB staff expect growth of about 2.5% this year and Papademos said he saw no significant impact from the market moves.

"The recent financial market turbulence has not affected our baseline scenario for medium-term economic growth in the euro area, which is favourable," Papademos told reporters, although he added that the volatility had increased uncertainty.

Julian Callow, chief European economist at Barclays Capital, said Weber's comments backed the case for further tightening. "The longer a rate hike is postponed, the more serious it implies the problems in financial markets are," he said. "This increases the chance of spillover into the real economy, potentially undermining the case for a rate rise."

Inflation Risks

ECB Executive Board member Juergen Stark said the ECB would stay "continuously vigilant," although he added later this comment should not be taken as a signal on rates.

The ECB has used the code words "vigilance" and "strong vigilance" to signal a rise in interest rates the following month and the fact that Trichet did not use this wording at his news conference on Thursday prompted traders to scale back bets on an October hike.

Trichet said on Friday that market interest rate expectations generally aligned well with the ECB's intentions but declined comment on whether Thursday's message had been properly understood.

Thirty-six of 60 economists polled by Reuters after Trichet's news conference on Thursday expected the ECB to raise rates by the year's end, a slimmer majority than the 62 out of 82 in an Aug. 30 poll.

Back in their home countries after the rate meeting, Luxembourg central bank governor Yves Mersch and Finland's Erkki Liikanen also emphasised the upside risks to inflation.

"Economic fundamentals are still good (in the euro zone), upside risks to prices still exist," Liikanen told reporters.

He said disorderly movements on financial markets were still a risk to the economic outlook but added, "We must remember that when investors take risks, these are their risks. It is not the task of central banks to bail out anyone."

Mersch said interest rates were still supporting growth.