Page last updated at 15:53 GMT, Thursday, 5 June 2008 16:53 UK

Trichet hints at future rate hike

The euro sign is seen in front of the European Central Bank in Frankfurt
The ECB has not changed interest rates since June 2007

The European Central Bank (ECB) has held interest rates for the euro bloc at 4% but hinted that it would increase them at its next meeting.

ECB President Jean-Claude Trichet admitted a future rise was "possible" and conceded that some members of its Governing Council favoured a hike.

Inflation in the eurozone was 3.6% in May, above the target of about 2%.

The interest rate has been kept steady since July 2007, helping the euro to record highs against the pound.

The euro rebounded from three-week lows seen earlier on Thursday after Mr Trichet hinted at the rise and gained 0.5% to $1.5511.

The CAC 40, the Dax and the FTSE 100 all dropped on the initial announcement of the rate hold.

Earlier on Thursday, the UK's Bank of England left its main interest rate at 5%.

'Heightened alertness'

Although the ECB held rates, there have been growing signs that the eurozone economy is weakening.

The NTC Research Institute's purchasing managers' index slumped in May to its lowest level since July 2003.

And official EU data showed that retail sales fell in April, adding to the call from some sectors for a reduction in rates.

I don't say [a rates hike] is certain. I say it's possible."
Jean-Claude Trichet
ECB President

ECB President Jean-Claude Trichet acknowledged that the Governing Council was in a "state of heightened alertness" about economic conditions but would take into account all prevailing factors before it made a decision.

"We considered - it is not excluded - that after having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation," said Trichet.

"I don't say it's certain. I say it's possible."

But he emphasised that a decision would be taken with reference to the specific inflation risk at the time of the next meeting.

Mr Trichet revealed that there had been some among the Governing Council who wanted to increase rates, but the decision was eventually reached by consensus.

Inflation 'too high'

Analysts have said the slowing economy means the ECB is likely to push up the interest rate when it next meets.

"After a strong start into 2008, the eurozone is losing a lot of momentum," said Holger Schmieding, senior european economist at Bank of America.

This week the Organisation for Economic Co-operation and Development (OECD) revised its eurozone inflation forecast for 2008 up to an average rate of 3.4% - which would be the highest level since 1993.

Eurozone inflation was "way too high for ECB comfort", said UBS economist Stephane Deo.

Davide Stroppa, an economist at Unicredit, said Trichet's comments proved the ECB was a step closer to increasing interest rates.

"The comment on the divided Council and the possibility of raising interest rates in July signals the stance of the ECB is definitely more aggressive than many were thinking," said Stroppa.

Expensive exports

The growth in prices has made the ECB reluctant to cut rates like its counterparts in the US and the UK, which analysts say have been more severely affected by the global credit problems.

The US Federal Reserve has aggressively cut its key interest rate from 5.25% to 2% since last September and the Bank of England has also been trimming UK rates.

The different approaches have sent the euro to record highs against the dollar and sterling since the beginning of the year.

This has made eurozone exports more expensive and sparked criticism from some leading exporters, including plane maker Airbus.

However, observers say that once inflation stabilises, the ECB will begin to cut interest rates as the eurozone's economy shows signs of cooling.

Euro inflation is 'uncomfortable'
02 Jun 08 |  Business
ECB head: Credit crunch 'ongoing'
19 May 08 |  Business
Fall in eurozone retail sales
07 May 08 |  Business
Prices fear in France and Germany
15 Apr 08 |  Business
Pound fall against euro continues
10 Apr 08 |  Business
ECB leaves rates unchanged at 4%
10 Apr 08 |  Business

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