FRANKFURT, Sept 13: The ECB says it is ready to raise interest rates, but the euro’s strength along with record oil prices and uncertainty from the US home loan crisis has delayed a hike that now looks even less likely.
The European Central Bank renounced last week increasing borrowing costs for the 13-nation eurozone and said it would wait for the banking system to settle down before making its next decision.
To ensure its position was clear, the bank has since stressed the rate hike was postponed, not abandoned.
But now, it “is rather improbable” the ECB will manage to retighten credit conditions for the massive economic bloc that includes Germany, France, Italy and Spain, and the bank should progressively back away from its initial plan, said Sylvain Broyer, an analyst at IXIS-cib.
At Commerzbank, chief economist Joerg Kraemer added: “The recent strength of the euro is a further argument not to expect the ECB to hike interest rates,” because the currency’s rise should curb both inflation and economic growth.
Speculation that US interest rates will soon be lowered pushed the euro to an all-time high of 1.3927 against the dollar in London on Thursday.
When the single currency gains strength, eurozone exporters are put at a disadvantage however because their products become more expensive abroad and it thus hampers economic growth.
Imports including oil are cheaper however, and a strong euro thus helps curb inflation.
But oil prices have also shot higher, hitting a fresh record of $80.20 a barrel in New York on Wednesday.
Higher crude prices were specifically mentioned by the ECB as a factor that could fuel inflation, along with more indirect taxes and wages that rose faster than worker productivity.
The central bank’s absolute priority is to make sure inflation does not get out of hand in the eurozone.
With economic growth still solid, as it noted in its monthly bulletin on Thursday, tighter credit conditions would normally be called for.
“In my view, the triple shock from the euro, oil and financial turbulence make it ever more likely that the ECB will be on hold until the middle of next year, even if oil and food prices drive up eurozone inflation temporarily to 2.5 or possibly 2.6 per cent in November and December this year,” said Holger Schmieding, chief economist at the Bank of America.
The ECB’s medium-term inflation target is close to but below 2 per cent.
Since December 2005, the principal eurozone interest rate has climbed from 2 to 4 per cent. More and more analysts now doubt the bank can go any higher.
Does that mean the ECB rate-hike cycle has come to an end?
For Joerg Kraemer the answer is yes.
Commerzbank analysts “are certain of a cut at the end of next year, in the fourth quarter,” he told AFP, adding that the central bank was too optimistic in its 2.3 per cent growth forecast for next year.
Schmieding said: “I still expect the global and euro economies to recover next year, which would prevent any ECB cut.
“At just 4 per cent, it would take a very dramatic and sustained worsening of the economic outlook to contemplate a rate cut,” he stressed.
As for the Bank of England, which has set its main lending rate at 5.75 per cent, “the next step is clearly a cut.” And with the US Federal Reserve still facing fall-out from the high-risk mortgage market crisis, “rate cuts from the current 5.25 per cent are inevitable,” Schmieding said. —AFP
