VALLENDAR (Germany), Jan 13: The European Central Bank must be vigilant and ensure inflationary expectations stay under control, President Jean-Claude Trichet said on Friday, underlining the bank’s readiness to raise interest rates again.
Keeping price growth under control will help jobs and growth in the 12-nation eurozone, Mr Trichet said, adding that he sees “encouraging” signs the economy is gradually heading toward its potential growth rate. Strengthening growth would heighten prospects for another credit tightening.
“Thanks to the credibility of the ECB Governing Council ... the anchoring of inflationary expectations has remained encouraging. But we have to be vigilant,” Mr Trichet said in an interview with Bloomberg Television at a business conference.
Mr Trichet used the word “vigilance” when he was preparing financial markets for December’s interest rate increase.
He avoided it at his news conference on Thursday, after the ECB held its benchmark rate at 2.25 per cent, so its recurrence on Friday sent June Euribor futures toward lows on the day, firming their pricing-in of at least one more ECB rate hike by mid year.
Earlier, ECB Governing Council member Axel Weber also sent a rather hawkish message, saying that money is extremely plentiful in the euro zone.
Asked about the risks of missing the ECB’s goal this year of getting inflation just below two per cent, Weber said: “We will do everything in order not to miss our goal.”
Eurozone inflation currently is running around a 2.2 per cent annual rate and for each of the last five years the ECB has failed to meet its inflation goal.
Weber echoed Trichet’s cautiously optimistic assessment of the economic outlook but stressed the need to “monitor very closely” the risks to both growth and inflation.
Even though money supply growth has dipped a little recently, credit conditions are loose, he said. “These indicators suggest to us that there’s significantly more liquidity than is necessary for low inflation growth”
“We have excess liquidity as before,” Weber said.
Traders in financial futures saw both Trichet and Weber’s anti-inflation determination and monetary worries as confirmation that they are correct to price for a quarter percentage point ECB rate hike in March.
Trichet had already lent weight to that position on Thursday by saying the ECB stood ready to act and that markets had understood the ECB’s message correctly.
However, some traders on Thursday had been disappointed that the ECB was not even more upbeat on the growth outlook, given sharp improvements in business survey data, an accelerating manufacturing sector and improvements in employment.
That had caused European government debt markets to scale back the pricing of 30-35 per cent probability for a February hike, causing some weakness in the euro.
“Trichet’s (Thursday) comments might not be as hawkish as some had expected, but they sure pointed to interest rates rising in the future,” said one London based debt trader.
—Reuters