ECB officials signal more interest rate increases this year

FE Team | Published: April 19, 2011 00:00:00 | Updated: February 01, 2018 00:00:00

WASHINGTON, April 18 (Bloomberg): European Central Bank (ECB) Governing Council members signaled they will keep tightening monetary policy this year to curb inflation as the economy strengthens. Investor expectations that the benchmark interest rate will be increased by another 50 basis points in 2011 are "well- founded," Austria's Ewald Nowotny told the news agency in Washington on April 16. Luc Coene of Belgium said in an interview Sunday that monetary "conditions are too accommodative." The suggestion that the ECB will soon raise its key rate again was echoed by other policy makers at the weekend meeting of the International Monetary Fund, even after President Jean-Claude Trichet said this month's quarter-point boost to 1.25 per cent wasn't necessarily the start of a series. Higher euro-area borrowing costs at a time when the US Federal Reserve is signaling no imminent move in its near-zero policy rate may support the euro after it fell last week on concern Europe's sovereign debt crisis isn't over. "Apparently there's consensus in the Governing Council to push interest rates higher," said Juergen Michels, chief euro- area economist at Citigroup Inc. by telephone from London. "It's not only about containing inflation but also to underline the bank's credibility." The euro, which has climbed 7 per cent against the dollar this year, eased to $1.4373 at 9 am in Frankfurt from as high as $1.4482 overnight. The ECB is balancing the need for tighter policy in countries like Germany, whose economy is booming, against the risk that it could exacerbate the debt crisis afflicting Greece, Ireland and Portugal. This month's rate shift from a record low was the first increase since July 2008 and came as data showed inflation accelerated to 2.7 per cent in March, the fastest since October 2008 and breaching the bank's 2 per cent limit for a fourth month. "We see a significant increase in inflationary pressure," Axel Weber of Germany said as he attended his final IMF talks before stepping down this month as Bundesbank president. Current policy is "supportive of the economy and expansive." Traders expect the ECB to raise its rate to 1.75 per cent by the end of the year, Eonia forward contracts show. Economists project the same result, according to the median of 24 forecasts in a Bloomberg News survey this month. "It's obvious that we have to take price movements very seriously," Nowotny said. The central bank "will of course" revise its inflation forecast after estimating in March that it would average about 2.3 per cent this year, he said.