ECB holds rate at 2.25%, may signal rise as growth picks up

Feb 2 | Updated: Feb 3 2006, 05:30am hrs
The European Central Bank left its benchmark interest rate unchanged and may wait for more evidence economic growth is accelerating before raising borrowing costs to contain inflation.

Policy makers meeting in Frankfurt on Thursday kept the refinancing rate at 2.25%, as forecast by all 35 economists in a Bloomberg News survey. The bank, which raised rates for the first time in five years in December, will probably act again next month, the survey showed.

Theres enough evidence to warrant a rate hike now, but I think they want to take things in stages, said Jonathan Loynes, chief European economist at Capital Economics Ltd in London. They dont want to surprise markets and theyll have the new staff forecasts next month, which will provide a good excuse to raise rates again.

The ECB forecasts inflation above its 2% ceiling for a seventh year in 2006 as the economy picks up and oil prices near records lead to demands for higher wages. The bank said Dec. 1 the economy will expand about 1.9% this year after 1.4% in 2005, and is due to update that forecast March 2.

Euro-region inflation probably accelerated to 2.4% in January from 2.2 percent in December, according to the median of 37 forecasts in a Bloomberg survey of economists. That report will be published by the European Union at 11 am on Friday. The jump in crude oil is increasing costs for consumers and companies and stoking inflation. Oil has risen 17% since Dec 19, approaching the record of $70.85 a barrel set in New York trading Aug. 30. The price was $66.94 on Thursday. The bank kept its benchmark rate at a six-decade low of 2% for more than two years to stimulate growth in the euro region, the worlds second-largest economy. When it raised rates on Dec. 1, the first increase since October 2000, Trichet said it hadnt necessarily embarked on a series of increases.

Investors are nevertheless betting the ECB will raise the rate to 2.5% in March and to as much as 3% by the end of 2006 as growth picks up, futures trading shows. The implied rates on the three-month contracts for March and December settlement were 2.69% and 3.18% respectively on Thursday.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECBs benchmark rate since the currencys launch in 1999. We have confirmation that the recovery is taking place, said Jean-Michel Six, chief European economist at Standard & Poors in London.