ECB leaves rates unchanged
The European Central Bank held interest rates steady overnight, with markets now looking for a sign from President Jean-Claude Trichet on whether he will soon follow the Bank of England and push rates higher.
Euro zone credit costs remain at a five-year high of 3.5 per cent after the Governing Council’s monthly policy meeting, but analysts and markets expect the ECB to move again in February or in March.
Mr Trichet’s1.30pm GMT news conference will be closely scrutinised to see if the ECB steps up its stance on inflation dangers by using the key phrase “vigilance'’, potentially signalling a February rise, or stays with a more low-key wording.
The Bank of England cited inflation concerns in its surprise decision to raise its key rate to 5.25 per cent overnight.
At the last ECB meeting five weeks ago, Mr Trichet said the central bank would monitor inflation dangers “very closely'’, words which he has used in the past to indicate a rate rise two months later.
But he later muddied the waters by saying it would be wrong to take this as a signal for a February move.
“It is really make-or-break for February in the markets today. Certainly we will get a signal on whether or not for February, but beyond that, probably not,'’ Dresdner Kleinwort economist Rainer Guntermann said.
“Some people are looking for hints on how far they will go this year and whether they will go in March but we probably won’t get clarity,'’ he said. “I expect another month of monitoring very closely. They have stepped away from the automatic signalling, but if they go, I think they will not go again before March.'’
The euro slipped after the Bank of England’s decision and still further on the ECB announcement to trade at $1.2987. Stocks nudged higher on relief that credit costs in the euro-zone were stable, while Euribor contracts pared some losses.
Steady increases in euro zone rates throughout 2006 have withdrawn much of the slack in monetary policy and mean the ECB’s Governing Council now faces less urgency to raise rates, making it more dependent on the flow of economic data than it was last year.
Mr Trichet is expected to stress continuing risks to inflation, not least from a rise in German value-added tax and solid growth in the 13 nations now sharing the euro, following the entry of Slovenia to the region last week.
In a newspaper interview, Slovenia’s new Governing Council member Mitja Gaspari said the ECB still had cause for concern about inflation. “Because of this the ECB should remain vigilant and act accordingly if necessary,'’ he told Germany’s Die Welt on Monday, in comments published overnight.
Overall, the euro zone economy starts 2007 on a more solid footing than it did 2006, although uncertainty persists about the effect of the German VAT rise on January 1 and an economic slowdown in the United States.
Oil prices dipped to a fresh 19-month low under $US53 ($68) per barrel overnight, down from more than $63 before the first ECB meeting in 2006 and improving inflation prospects.
Euribor interest rate futures overnight gave about a 36 per cent chance of a quarter per centage point rise in February and a 98 per cent chance of a rate rise by the end of March.
Backing the case for a February rise is an acceleration in German economic growth to a six-year peak of 2.5 per cent in 2006, although a drop in French industrial output cast a shadow over the region’s second largest economy.
Employment and business confidence have risen strongly, unemployment is at its lowest since euro zone records began in 1993 and activity in manufacturing and services remains high.
The job gains boost workers’ leverage to demand higher wages and inflation risks are also seen in an acceleration of money supply growth to a 16-year high in November.
However, policymakers will have little new hard data to consider by the Febuary 8 meeting.
Economic growth figures for the fourth quarter are not due until Febuary 13 and many economists think the ECB will prefer to wait another month to gauge the impact of the German tax rise.