Central banks signal fight on inflation

European central bankers on Thursday signalled that they would act to control inflationary pressures across the Continent as the Bank of England raised interest rates and the European Central Bank indicated it would move rates higher in June.

Jean-Claude Trichet, ECB president, committed the ECB to “strong vigilance” – a phrase widely understood to mean an interest rate rise is a month away. Eurozone interest rates are currently 3.75 per cent.

The Bank of England increased its main interest rate by a quarter point to 5.5 per cent, its highest rate in six years, citing strong business investment and “signs that businesses are more able to push through price increases”.

With the US Federal Reserve reiterating its main concern that “inflation will fail to moderate as expected” on Wednesday and the Bank of Japan’s governor on Thursday making the case for gradual increases in interest rates, all the world’s big central banks have now flagged that their primary focus remains the control of inflation.

Economists expect the peak of the current European interest rate cycle to come this year but markets still think there is a good chance of another rise in the UK and a further rise in the eurozone after June’s increase.

Commenting after a meeting of the ECB’s governing council in Dublin, Mr Trichet said “upside risks” to inflation remained, citing increasing capacity utilisation and the threat of high wage deals.

But there were signs that higher interest rates in the 13-country eurozone are already having an effect, Mr Trichet added. Higher interest rates were influencing money and credit data watched closely by the ECB as longer term inflation indicators, “although they have not, as yet, significantly dampened the overall strength of these dynamics”.

Mr Trichet deliberately left the door open for further rises beyond June – financial markets see a good chance of another quarter point rise, to 4.25 per cent, by the end of the year.

Asked aboutthe ECB’s intentions beyond June, he said: “I will only say that we will do whatever is necessary to ensure price stability.”

Mr Trichet highlighted as an inflation risk, “stronger than currently expected wage developments in a context of ongoing robust growth in employment and economic activity”. But he appeared reasonably content that the landmark deal struck by Germany’s powerful IG Metall trade union in the country’s engineering sector had not proved as generous as some had expected.

In London, the Bank of England took the widely expected decision to raise rates by a quarter point. It highlighted strong business investment and the growing desire and ability of companies to raise prices.

It encourages investors not to study its statement too closely as Mervyn King, the Bank’s governor, dislikes what he views as “monetary policy by codeword”.

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