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Trichet Says Further ECB Rate Increases May Be Needed (Update1)

By Matthew Brockett and John Fraher

Oct. 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said more interest-rate increases may be needed to curb inflation after the bank raised its benchmark rate for the fifth time in 10 months today.

``The market has in mind further moves, I wouldn't say anything to correct this sentiment,'' said Trichet at a press conference in Paris after the central bank raised the refinancing rate to 3.25 percent from 3 percent. ``It will remain warranted to further withdraw monetary accommodation'' should the economy progress as the ECB forecasts.

The ECB says it's concerned the fastest economic expansion since 2000 will stoke demands for higher wages even after inflation last month slowed below its 2 percent limit for the first time in 20 months. Higher credit demand also raises the risk that increases in consumer prices will accelerate again next year.

``The tone of Trichet's commentary at the ECB press conference remains hawkish,'' said David Brown, chief European economist at Bear Stearns International in London. ``The suggestion of progressive further withdrawal of monetary accommodation implies that the ECB probably intends to extend its tightening cycle beyond December into next year.''

The ECB ``will continue to monitor all developments'' to ``ensure price stability over the medium and longer term,'' said Trichet today. Policy makers meet away from the ECB's Frankfurt headquarters twice a year.

Investor Bets

Most investors expect the ECB to raise its key rate at least once more in December and keep them there next year, futures trading suggests. The implied rate on the three-month Euribor futures contract for December delivery was 3.68 percent today, about the same level as before Trichet's press conference. The rate on the June contract was at 3.80 percent.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.

The euro slipped after Trichet's comments, declining to $1.2688 from $1.2726 earlier.

Today's decision ``reflects the upside risks to price stability over the medium term that we have identified through both our economic and monetary analysis,'' said Trichet. The ECB said Aug. 31 it expects inflation to stay at about 2.4 percent this year and next, breaching its 2 percent limit for an eighth year.

Oil Effect

While inflation slowed to 1.8 percent last month after oil prices retreated from a record $78.40 a barrel in July, faster economic growth and falling unemployment are encouraging labor unions to ratchet up wage demands. The jobless rate was 7.9 percent in August compared with 8.5 percent a year earlier.

ThyssenKrupp AG and Salzgitter AG, Germany's largest steelmakers, last month agreed to the highest wage increases in more than 10 years. Salaries for 85,000 steelworkers in the states of North Rhine-Westphalia, Lower Saxony and Bremen will rise 3.8 percent from 2007.

Money-supply growth, which the ECB uses as a gauge of future inflation, unexpectedly accelerated in August, giving the bank additional scope to raise rates. Credit to businesses and households jumped 11.9 percent, the most since the ECB took charge of monetary policy eight years ago.

Trichet hinted after the governing council's last rate- decision meeting the ECB would raise borrowing costs today when he said that ``strong vigilance'' on inflation was necessary -- words he's used in the past to flag imminent policy tightening. He didn't use that language today.

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