Trichet hints interest rate hike in eurozone

Trichet hints interest rate hike in eurozone

	Published : Sat, 04 Feb 2006 20:05 By : David Simms Print this Story

LONDON: Euro zone interest rates are to go up in March, European Central Bank chief Jean-Claude Trichet has hinted. After announcing the central bank's decision on retaining the interest rates at 2.25 per cent Thursday, Trichet told a subsequent news conference that the rates would rise next month, but gave no clue on the extent of the increase or policy issues involved in the hike.

Futures markets are suggesting at least two more quarter-percentage point rate hikes this year -- or even three -- but Trichet is refusing to commit anything.

Economists suggest the bank will not be able to commit to a series of rate hikes as done by the U.S. Federal Reserve (which has raised borrowing costs by a quarter-point at each of its last 14 meetings) because of political pressures, the increasing unemployment rates in the bloc, for example. They are optimistic that there could be a broadening recovery in the euro zone shortly, which will embolden the bank to embark on a more rigid policy faster than the markets currently expect.

Some of them expect the rates to rise to 3.5 per cent by the end of the year, giving better scope for bond yields and the euro. Futures prices show the rates could be just under 3 per cent by end-2006.

There is an evident increase in euro zone bank lendings to businesses, prompted by a series of mergers and acquisitions and business consolidations. This must encourage the bank to have a firmer policy in place, feel the economists.

The euro zone inflation too has picked up, mostly on account of increasing oil prices. In January it stood at 2.4 per cent, up from 2.2 per cent, according to EU's statistical unit Eurostat.

A recent survey by the bank on commercial bank lending in euro zone showed that demand for loans or credit lines to businesses in the last three months of 2005 had reached the highest level since 2003. The survey found that the difference between the percentage of banks having increased demand and those experiencing a fall widened to 23 per cent, from 17 per cent in the October survey.

The bank has also taken into account the pick-up in investment since mid-2005 as a sign that economic recovery is now getting beyond the export-led growth. Trichet has said the effect would have impact on consumption.

Meanwhile, an index, based on a survey of purchasing managers at service companies in the euro zone, rose to 57 in January from 56.8 in December, said a report by NTC Research Plc for Royal Bank of Scotland Group Plc. A reading above 50 shows growth.

The report said business confidence for the coming year rose to a two-year high and increased in Germany, France, Italy and Spain. Employment picked up in all the four countries.

Trichet has urged European government to deregulate service industries to increase competition, create jobs and control inflation. He had said at the news briefing Thursday that a higher level of competition in the services market should have a damping impact on prices.

Meanwhile, the dollar climbed to a one-month high against the euro with the latest jobs report for the U.S. indicating fairly clearly that the Fed is all set to raise the cost of borrowing at least one more time in this cycle.

In the last few months, the euro has rallied against the dollar on a growing market view that the yield-supporting factors that helped the dollar rally last year may have ended as the ECB is readying for another rate hike.