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By Mark Landler The New York Times
FRIDAY, APRIL 7, 2006
FRIDAY, APRIL 7, 2006
FRANKFURT Surprising investors and sending the euro and other currencies pinwheeling, the European Central Bank on Thursday doused widespread expectations that it would raise interest rates next month as part of its gradual tightening of monetary policy.
The bank's decision to leave its key interest rate at 2.5 percent this month was expected. But the bank's president, Jean-Claude Trichet, said markets were wrong to bet on an interest rate increase in May - a rare jolt from an institution that, under Trichet, has strived for dogged predictability.
"With those few, clear words, the May rate hike is off the table, and I'm not even sure about June," said Elga Bartsch, an economist at Morgan Stanley in London. "I think it was very disappointing."
Trichet's comments, however unexpected, did not represent an about-face in the bank's strategy. He noted that the bank could well raise interest rates in June, when its governing council is to meet in Madrid. And he left little doubt that the ECB would continue to tighten credit in Europe.
Interest rates are at "very low levels" and the policy "remains accommodative," Trichet said at a news conference, using phrases meant to convey that the bank would stick to its present course.
Still, the crossed wires left central bank watchers puzzled, especially since Trichet has labored in recent months to dispel confusion about the bank's plans. In November, for example, he announced the bank would soon raise interest rates for the first time in five years. A month later, it did so.
Some analysts said the recent rally in the euro against the dollar might have stilled the bank's hand. After rising from $1.19 to $1.23 since March 28, the euro fell 0.7 cent on Thursday, after Trichet's remarks. A strong euro makes Europe's exports more expensive.
Others speculated there might be divisions within the bank about how quickly it should move. The governing council's deliberations are private, and Trichet shed little light on them Thursday.
For his part, Trichet suggested that economists had placed too much significance in recent surveys of business confidence and manufacturing orders in Germany, which showed a striking improvement in Europe's largest economy. The monthly Ifo survey, which tracks the sentiment of corporate executives, soared to its highest level in March since early-1991.
Such optimism would seem to foretell an economic boom, and analysts predicted in the past two weeks that it would erase any lingering reluctance on the part of the bank to tighten monetary policy.
The trouble is, Germany's real growth is far less scintillating than its sentiment. In setting interest rates, Trichet said, the bank focused on broad trends, not what he called "soft data." "It's probably normal to take the last information you receive, and to consider it very important," he said.
The bank also somewhat played down the risk of inflation. Trichet did not say that the bank would be vigilant in monitoring price increases - a frequently used code word for a rate increase - even though inflation in Europe is still running slightly above 2 percent, the bank's target level.
But Trichet said that upward pressure on wages had so far remained moderate. And he seemed slightly less worried than in previous months about the effect of high oil prices on consumer prices.
Fears of wage inflation have grown in recent weeks as Germany's most powerful union, IG Metall, began a crucial round of negotiations with employers. The union has demanded an average wage increase of 5 percent, though economists expect it to extract perhaps half that.
Reaction to the bank's news conference, however, focused less on economic analysis than on its communication policy. Economists noted that in the last month, two members of the governing council, Axel Weber of Germany and Yves Mersch of Luxembourg, spoke publicly of the need to combat inflation - a usually reliable signal of a rate increase.
Thomas Mayer, the chief European economist at Deutsche Bank in London, said, "It was not misdirection, but perhaps it was reassurance for the market to go in the wrong direction."
Holger Schmieding, an economist at Bank of America in London, said, "These comments may not have reflected much of a consensus." Schmieding added, "If there is considerable disagreement about the pace of a rate increase, then the ECB should have corrected that misperception much earlier."
For all the speculating and second- guessing, the European Central Bank remains on course to rein in monetary policy. Schmieding said he expected two more interest rate increases, of a quarter point each, which would bring interest rates to 3 percent by the end of this year
The bank's decision to leave its key interest rate at 2.5 percent this month was expected. But the bank's president, Jean-Claude Trichet, said markets were wrong to bet on an interest rate increase in May - a rare jolt from an institution that, under Trichet, has strived for dogged predictability.
"With those few, clear words, the May rate hike is off the table, and I'm not even sure about June," said Elga Bartsch, an economist at Morgan Stanley in London. "I think it was very disappointing."
Trichet's comments, however unexpected, did not represent an about-face in the bank's strategy. He noted that the bank could well raise interest rates in June, when its governing council is to meet in Madrid. And he left little doubt that the ECB would continue to tighten credit in Europe.
Interest rates are at "very low levels" and the policy "remains accommodative," Trichet said at a news conference, using phrases meant to convey that the bank would stick to its present course.
Still, the crossed wires left central bank watchers puzzled, especially since Trichet has labored in recent months to dispel confusion about the bank's plans. In November, for example, he announced the bank would soon raise interest rates for the first time in five years. A month later, it did so.
Some analysts said the recent rally in the euro against the dollar might have stilled the bank's hand. After rising from $1.19 to $1.23 since March 28, the euro fell 0.7 cent on Thursday, after Trichet's remarks. A strong euro makes Europe's exports more expensive.
Others speculated there might be divisions within the bank about how quickly it should move. The governing council's deliberations are private, and Trichet shed little light on them Thursday.
For his part, Trichet suggested that economists had placed too much significance in recent surveys of business confidence and manufacturing orders in Germany, which showed a striking improvement in Europe's largest economy. The monthly Ifo survey, which tracks the sentiment of corporate executives, soared to its highest level in March since early-1991.
Such optimism would seem to foretell an economic boom, and analysts predicted in the past two weeks that it would erase any lingering reluctance on the part of the bank to tighten monetary policy.
The trouble is, Germany's real growth is far less scintillating than its sentiment. In setting interest rates, Trichet said, the bank focused on broad trends, not what he called "soft data." "It's probably normal to take the last information you receive, and to consider it very important," he said.
The bank also somewhat played down the risk of inflation. Trichet did not say that the bank would be vigilant in monitoring price increases - a frequently used code word for a rate increase - even though inflation in Europe is still running slightly above 2 percent, the bank's target level.
But Trichet said that upward pressure on wages had so far remained moderate. And he seemed slightly less worried than in previous months about the effect of high oil prices on consumer prices.
Fears of wage inflation have grown in recent weeks as Germany's most powerful union, IG Metall, began a crucial round of negotiations with employers. The union has demanded an average wage increase of 5 percent, though economists expect it to extract perhaps half that.
Reaction to the bank's news conference, however, focused less on economic analysis than on its communication policy. Economists noted that in the last month, two members of the governing council, Axel Weber of Germany and Yves Mersch of Luxembourg, spoke publicly of the need to combat inflation - a usually reliable signal of a rate increase.
Thomas Mayer, the chief European economist at Deutsche Bank in London, said, "It was not misdirection, but perhaps it was reassurance for the market to go in the wrong direction."
Holger Schmieding, an economist at Bank of America in London, said, "These comments may not have reflected much of a consensus." Schmieding added, "If there is considerable disagreement about the pace of a rate increase, then the ECB should have corrected that misperception much earlier."
For all the speculating and second- guessing, the European Central Bank remains on course to rein in monetary policy. Schmieding said he expected two more interest rate increases, of a quarter point each, which would bring interest rates to 3 percent by the end of this year
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