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ECB confirms intention to raise rates further

The European Central Bank today reiterated its intention to continue to gradually raise its key interest rates further as the economic recovery gathers pace in the 12 countries that share the euro.

'If the bank's assumptions with regard to the economic outlook were confirmed, a progressive withdrawal of monetary accommodation will be warranted', the ECB wrote in its August monthly report published today.

Last week, the ECB raised its benchmark 'refi' refinancing rate by a quarter of a percentage point to 3%. It was the fourth such move since December and ECB watchers expect the bank to continue to raise euro zone borrowing costs in coming months in order to keep area-wide inflation in check.


After the latest rise in interest rates, ECB rates 'remain low in both real and nominal terms, money and credit growth remain strong and liquidity in the euro area is ample by all plausible measures,' the report said.

With rates at 3% - the highest level in over three and a half years - 'the ECB's monetary policy therefore continues to be accommodative,' the bank added. ECB watchers predict that interest rates could stand at 3.5% by the end of this year.

The ECB is worried about inflationary pressures in view of the continued rise in oil prices and stronger economic growth in the single currency area.

In its latest survey of professional economic forecasters, the results of which were published in the ECB's August monthly bulletin, experts expect the annual rate of area-wide inflation to reach 2.3% this year and 2.1% in 2007, above the ECB ceiling of 2%. The experts have upgraded their inflation forecasts since the last survey in May.

The inflation outlook 'is expected to be largely shaped by oil price developments and the planned increase in German value-added tax in January 2007,' the ECB wrote in its report today. 'Oil prices are seen as a major source of upward risk, particularly in 2006 and 2007,' it added.

The professional economic forecasters also upgraded their growth forecast for the euro zone economy for 2006, while downgrading slightly the 2007 forecast. According to the ECB poll, the experts are pencilling in growth of 2.2% for 2006, up from 2.1% previously.

And the euro zone economy was expected to grow by 1.8% in 2007, as opposed to the previous forecast of 1.9%, the ECB said.

The upward revision for the current year 'reflects perceptions of a more positive external environment which should support exports and domestic demand, especially private consumption and investment,' the ECB wrote.

'According to several respondents, private consumption growth should also benefit from improving labour market conditions, the effects of the Football World Cup and in part also from anticipated spending in the second half of 2006 ahead of the planned VAT hike in Germany in January 2007,' the bank added.

In 2007 and 2008, economic growth was expected to decline slightly, 'mainly reflecting high oil prices and a slowdown in the global economy,' the ECB said.
http://www.rte.ie/business/2006/0810/ecb.html