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ECB Signals Tightening Bias Despite Strong Euro

European Central Bank President Jean-Claude Trichet signaled the bank was still biased towards a rate hike to counter rising inflation, despite calls from various European politicians for action to curb the euro's rise against the dollar.

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Earlier this month, Trichet left his options open after the ECB held rates unchanged for the second time in a row during its tightening cycle to allow more time for the economic consequences of the credit-market turmoil to play out.

"The ECB's monetary policy stands ready to counter upside risks to price stability," Trichet told a European Parliament hearing Tuesday.

But before deciding on future monetary policy, "the Governing Council deems it necessary to gather additional information and carefully examine all new data," Trichet added.

The ECB lent banks 218 billion euros in seven-day funds Tuesday, at an average rate of 4.16% at a weekly auction. The amount was 40 billion euros more than its benchmark estimate of banks' liquidity needs, Reuters said, in a sign that the cash squeeze was far from over.

The bank has come under pressure to cut rates from various European politicians and business people over the past few weeks as more and more exporters complained the single European currency's appreciation has hurt their business.

Inflation Risk

But Trichet warned price rises in the 13-member euro zone were going to stay above the ECB's comfort level for a while.

"The inflation rate is expected to remain significantly above 2% in the near future, including the first half of 2008, before moderating again," he said.

Analysts said the euro zone's economy was still growing at a healthy pace and politicians' worries that a strong euro would harm exports were little justified at this point.

"Most of Europe's fast-growing trade markets are … in emerging markets and exporters are not under pressure from them," Sarah Hewin, senior economist at American Express Bank, told "Worldwide Exchange."

The recent firming of the dollar, driven by increased perception that the Federal Reserve will not cut rates at its meeting at the end of the month, is likely to be short-lived, some economists predicted, as the subprime crisis is still unfolding.

Euro May Rise Again

The euro might resume its upward march against the greenback, analysts said, as the European economy was seen as more diversified and less exposed to the crisis.

"I see it (the euro) breaking the $1.45 level at the turn of the year," Christian Schwerdntner, from First Private Asset Management, told "Worldwide Exchange."

Trichet reiterated previous statements that exchange rates "should reflect economic fundamentals," and that "excess volatility and disorderly movements" in exchange rates are "undesirable" for economic growth.

However, some economists said central banks should stay away from intervention and allow currency markets to find their own levels.

"When they (central banks) intervene, they add risk," David Kotok, Chairman at Cumberland Advisers, told "Worldwide Exchange."