ECB raises rates and promises future step
By Mark Landler The New York Times
FRIDAY, MARCH 3, 2006
FRANKFURT: With Europe finally on firm economic footing, the European Central Bank raised interest rates Thursday for the second time in three months and signaled more increases to come.
The decision, which had been widely expected, lifted the bank's benchmark rate by a quarter point to 2.5 percent, a level that its president, Jean-Claude Trichet, said was still "very low."
Pointing to the bank's new growth forecasts, which were revised upward from December, Trichet sounded confident that Europe was shaking off its long economic slumber. Rising oil prices, though, have also pushed up inflation, which Trichet said warranted tighter credit.
"The decision reflects the upside risks to price stability," Trichet said at a news conference in Frankfurt. He added later, "We did not decide today, ex ante, on a series of monthly rate increases."
Those words were a deliberate echo of Trichet's guarded tone in December, when the bank raised rates for the first time in five years. By giving little hint of the timing of the next rate increase, Trichet has left the bank's 18-member governing council a degree of flexibility.
The euro rose strongly against the dollar, trading above $1.20 in New York, as currency markets reflected the likelihood of tighter monetary policy. Economists generally expect the bank to act again in June, and nothing Trichet said Thursday threw that into doubt.
"He implicitly admitted that they have a bias for a tighter policy," said Thomas Mayer, the chief European economist at Deutsche Bank. "They believe that rates are very low and need to be higher."
The bank's disciplined tone did not insulate it from criticism by some European politicians, who fear that tightening credit even slightly will choke off a fragile economic recovery in the European Union.
Italy's deputy trade minister, Adolfo Urso, said the rate increase was a "mistake" that would hurt exports. Italy's economy is one of the slowest growing in Europe, largely because its exports have become less competitive.
"There is a serious problem" with growth, he said in a statement, "and hiking the cost of money takes oxygen from the recovery."
Yet observers noted that the bank's forecasts would suggest a bolder upward move on rates. Its revised projections, for example, foresee inflation running at solidly above 2 percent this year and in 2007.
The bank's cardinal goal is to keep inflation at or below 2 percent.
"The way the data are shaping up, they might consider slightly speeding up the pace of tightening," said Elga Bartsch, an economist at Morgan Stanley. "The situation today is different than in December."
At the end of last year, Europe was balanced between hope and foreboding.
At the time, the underlying economic omens were positive and the optimism of business people was soaring. But weak Christmas sales in Germany and elsewhere kindled fears that Europe could easily relapse.
Those fears have largely dissipated. Retail sales in Germany jumped 2.7 percent in January, while orders for machinery surged. Economists now believe the optimistic corporate surveys are not a fluke.
"As long as the data point to an ongoing economic recovery, they should feel comfortable about normalizing rates," Bartsch said. "If anything, the survey numbers are more robust than before."
Economists hold different views of what constitutes a normal level for rates, but it tends to be between 3 percent and 3.5 percent.
That would imply at least one further rate increase this year, and more likely two.
With the bank's decision so widely expected, much of the attention on Thursday focused on whether Trichet would wade into the debate in Europe over the resurgence of protectionism and nationalism in France and Spain, after several cross-border takeover attempts.
"We are expecting all the rules of the European single market to be respected," Trichet said.
But he said the bank's board had not discussed the French government's plan to fend off an Italian takeover of the French utility Suez, or Spain's effort to thwart a German takeover of the Spanish utility Endesa
The decision, which had been widely expected, lifted the bank's benchmark rate by a quarter point to 2.5 percent, a level that its president, Jean-Claude Trichet, said was still "very low."
Pointing to the bank's new growth forecasts, which were revised upward from December, Trichet sounded confident that Europe was shaking off its long economic slumber. Rising oil prices, though, have also pushed up inflation, which Trichet said warranted tighter credit.
"The decision reflects the upside risks to price stability," Trichet said at a news conference in Frankfurt. He added later, "We did not decide today, ex ante, on a series of monthly rate increases."
Those words were a deliberate echo of Trichet's guarded tone in December, when the bank raised rates for the first time in five years. By giving little hint of the timing of the next rate increase, Trichet has left the bank's 18-member governing council a degree of flexibility.
The euro rose strongly against the dollar, trading above $1.20 in New York, as currency markets reflected the likelihood of tighter monetary policy. Economists generally expect the bank to act again in June, and nothing Trichet said Thursday threw that into doubt.
"He implicitly admitted that they have a bias for a tighter policy," said Thomas Mayer, the chief European economist at Deutsche Bank. "They believe that rates are very low and need to be higher."
The bank's disciplined tone did not insulate it from criticism by some European politicians, who fear that tightening credit even slightly will choke off a fragile economic recovery in the European Union.
Italy's deputy trade minister, Adolfo Urso, said the rate increase was a "mistake" that would hurt exports. Italy's economy is one of the slowest growing in Europe, largely because its exports have become less competitive.
"There is a serious problem" with growth, he said in a statement, "and hiking the cost of money takes oxygen from the recovery."
Yet observers noted that the bank's forecasts would suggest a bolder upward move on rates. Its revised projections, for example, foresee inflation running at solidly above 2 percent this year and in 2007.
The bank's cardinal goal is to keep inflation at or below 2 percent.
"The way the data are shaping up, they might consider slightly speeding up the pace of tightening," said Elga Bartsch, an economist at Morgan Stanley. "The situation today is different than in December."
At the end of last year, Europe was balanced between hope and foreboding.
At the time, the underlying economic omens were positive and the optimism of business people was soaring. But weak Christmas sales in Germany and elsewhere kindled fears that Europe could easily relapse.
Those fears have largely dissipated. Retail sales in Germany jumped 2.7 percent in January, while orders for machinery surged. Economists now believe the optimistic corporate surveys are not a fluke.
"As long as the data point to an ongoing economic recovery, they should feel comfortable about normalizing rates," Bartsch said. "If anything, the survey numbers are more robust than before."
Economists hold different views of what constitutes a normal level for rates, but it tends to be between 3 percent and 3.5 percent.
That would imply at least one further rate increase this year, and more likely two.
With the bank's decision so widely expected, much of the attention on Thursday focused on whether Trichet would wade into the debate in Europe over the resurgence of protectionism and nationalism in France and Spain, after several cross-border takeover attempts.
"We are expecting all the rules of the European single market to be respected," Trichet said.
But he said the bank's board had not discussed the French government's plan to fend off an Italian takeover of the French utility Suez, or Spain's effort to thwart a German takeover of the Spanish utility Endesa
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