ECB ready to raise rates moderately

Frankfurt, Nov 18 | Updated: Nov 19 2005, 07:14am hrs
The European Central Bank is ready to raise interest rates moderately for the first time in five years, ECB President Jean-Claude Trichet said on Friday, sending markets a very clear signal that the Bank would tighten credit at its next meeting on Dec. 1.

The ECBs action would still leave interest rates at a low level, supporting economic growth, Trichet said. The Governing Council is ready to take a decision to move interest rates and to moderately augment the present level of intervention rates in order to take into account the level of risks to price stability that have been identified, Trichet said.

We will withdraw some of the accommodation, which is in the present monetary stance, while this policy would remain accommodative. This move would aim at coping with the inflationary risk, he said.

The comments ended weeks of intense speculation in financial markets over the timing of an ECB rate hike, and the euro shot sharply 3/4 cents higher against the US dollar on the news to $1.1742, while December Euribor futures contract hit a 7-1/2 month low on expectation of a 0.25 percentage point rate increase to 2.25%.

Quite blunt, heavily signalled, said Marc Ostwald, bond analyst at Monument Securities in London. Hawkish remarks from some ECB policymakers since early November had caused debt futures markets to brace for a December hike, but other ECB officials were expressing more caution given the fragility of recovery and no sign that high oil prices and years of cheap credit in the euro zone were pushing up wages and prices broadly in the 12-nation region. Euro zone politicians also had urged no hasty action. Even this morning Italys Deputy Economy Minister Mario Baldassarri, speaking to the same Frankfurt European Banking Congress that Trichet was addressing, said higher rates were not needed until the euro weakened significantly. Trichet, however, sought to provide assurance that the central banks move would be only modest and that by keeping inflationary pressures in check it would only enhance growth prospects in the region.