ECBs Trichet boxed in as inflation signs mount, say economists

April 28 | Updated: Apr 29 2006, 05:30am hrs
European Central Bank President Jean-Claude Trichet may have made a mistake when he ruled out a May interest rate increase, limiting his ability to respond to signs inflation is accelerating, say economists at Bank of America Corp. and Morgan Stanley.

Since Trichet said on April 6 there was a high probability that investor expectations of a May rate increase were wrong, crude oil prices have climbed to a record, inflation exceeded the ECBs ceiling for a 15th month and a report from the central bank showed loan growth in March accelerated to its fastest pace since at least 1999.

The ECB now faces a dilemma of its own making, said Holger Schmieding, European economist at Bank of America in London.

The bank can either change tack and still raise rates on May 4, potentially at great costs to its credibility in the markets, or the ECB can stay put and try to explain why rates should still be on hold.

ECB policy makers including vice-president Lucas Papademos have toughened their inflation-fighting language, prompting renewed speculation the central bank will raise borrowing costs next week. While Trichet has said the bank can move at any time, economists who were confounded by him last month predict the ECB will wait until June.

Trichet will hold a press conference after the ECBs rate decision May 4. All 46 economists surveyed by Bloomberg News expect the ECB to leave rates at 2.5% and a separate survey of 26 economists pointed to an increase to 2.75% in June.

Traders expectations for higher rates rose this week after Papademos said April 25 further increases are warranted, German business confidence rose to a 15-year high and loan growth surged 10.8%.

Bloomberg