The European Central Bank deliberately left room for manoeuvre on the timing of future interest rates rises after raising its main rate by a quarter percentage point to 4 per cent.
Jean-Claude Trichet, ECB president, made clear that further increases in borrowing costs were possible. Inflation risks remained on the “upside,” and ECB forecasts suggested it was likely to breach again its goal of an annual inflation rate “below but close” to 2 per cent.
But Mr Trichet refrained from offering clues on the timing of the next increase in borrowing costs – and his comments led financial markets to scale back slightly expectations of a rise as early as September.
Since December 2005, the ECB has responded to the eurozone’s economic recovery by raising interest rates eight times, on each occasion by a quarter percentage point. Economic growth last year reached almost 3 per cent. Wednesday’s rise took the main rate to its highest since September 2001.
Economists think interest rates of 4.5 per cent or 4.75 are possible. Julian Callow, economist at Barclays Capital, said there had been episodes during the tightening cycle “where there was this sense that we might be approaching a bit of a pause, but then things came and surprised us”.
Yet, Mr Trichet’s words created confusion in financial markets. Elga Bartsch, an economist at Morgan Stanley, said her “best guess” was the next move would be in September, but “it is not a done deal”.
Mr Trichet pledged to “monitor closely” inflationary developments, rather than “monitor very closely” – a phrase used in the past to indicate an interest rate rise was a few months away.
Mr Trichet also went further than before in hinting that the ECB might soon revise up its estimate of the eurozone’s potential growth rate, which would imply interest rates would rise at a slower rate.
Analysts noted the emphasis on interest rates “still” being accommodative – implying they might soon no longer be supportive of growth. The upsurge in investment spending “shows the extent to which things might change rapidly,” Mr Trichet said later.
By avoiding clear signals on the next rate rise, the ECB can watch economic developments. Mr Trichet added “potential shifts in financial market sentiment” to his list of risks to growth, highlighting his fears that markets misprice risks.
But the ECB remains worried about a pick-up in inflation. Its forecasts envisage the annual rate of inflation in a range with a mid-point of 2 per cent this year and in 2008.