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Last Updated: Monday, 21 November 2005, 15:18 GMT
Trichet re-affirms ECB rate rise
ECB President Jean-Claude Trichet
Mr Trichet's comments were seen as an early announcement
Jean-Claude Trichet, president of the European Central Bank (ECB), has told the EU Parliament rates must go up.

The ECB has kept interest rates at 2% for more than two years, but now believes they need to go up to tackle the threat of oil-driven inflation.

Mr Trichet said the governing council was "ready to take a decision to moderately augment the present level of interest rates" at its next meeting.

The news means that ECB rates are likely to rise by 0.25% on 1 December.

The move would affect interest rates in the 12 countries that use the euro, the so-called eurozone.

An ECB rate hike in December would be a classic case of bad timing
David Brown, Bear Stearns

Mr Trichet warned that inflationary pressures were growing in the eurozone despite weak economic growth.

He said that consumer inflation now stood at 2.5%, well ahead of the ECB's target of 2%, and that monetary indicators and the level of borrowing both pointed to growing pressure on prices.

The intention was to "preserve and maintain" price stability and to maintain the credibility of the ECB as an inflation-fighter.

This would lead to lower interest rates, more job creation, and easier borrowing for governments in the long-term.

"We will do what we have to do," Mr Trichet said, but he denied that there was any definite plan for further rate increases in the future.

Political firestorm

But his comments were criticised by politicians who warned that the ECB could be choking off the EU's fragile economic recovery.

Luxembourg's finance minister Jean-Claude Juncker, who chairs the eurozone group, said that he still saw no signs of inflationary wage developments in the eurozone that would warrant an interest rate rise by the European Central Bank.

Euro notes

And politicians in the EU Parliament from across the political spectrum wondered why EU consumers needed to pay higher mortgage rates when unemployment was still so high.

Some commentators say the ECB is likely to raise rates several times in the months ahead to keep the lid on inflation in the eurozone, with an ultimate target of 3%.

"We currently favour a rate hike every three months," said Bob Maes, fixed income strategist with KBC.

Growth effect?

However, some economists also questioned whether more rate hikes were needed.

"An ECB rate hike in December would be a classic case of bad timing," said David Brown, European economist at Bear Stearns.

But the ECB argues that it is better to take modest action sooner rather than wait for inflationary pressures to build.

"Prevention is better than cure and a moderate rate rise is better sooner than later," said ECB governing council member Klaus Liebscher.

Economic growth in the eurozone is predicted to recover to 1.9% in 2006, following a very weak 1.3% this year.

Bear Stearns predicts that interest rates of 3% could reduce economic growth by 0.4%.




SEE ALSO:
Trichet: 'interest rates to rise'
18 Nov 05 |  Business
Trichet not satisfied with growth
03 Oct 05 |  Business
IMF cuts global growth forecasts
21 Sep 05 |  Business
ECB builds hopes for euro economy
05 Aug 05 |  Business
Eurozone rates kept on hold at 2%
04 Aug 05 |  Business
IMF cuts eurozone growth forecast
03 Aug 05 |  Business


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