ECB hints at 25bp in August

At the meeting of the Governing Council of the European Central Bank on Thursday July 6 the Council decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 2.75%, 3.75% and 1.75% respectively.

These are 50 basis points below the equivalent Cyprus rates.

However, the tone of the ECB President, Jean-Claude Trichet, at the presss conference on Thursday suggested that a 25 basis point increase was comign in the meeting of August 3.

Trichet said that since the Council’s previous meeting new information confirmed that “a further withdrawal of monetary accommodation was warranted to contain upside risks to price stability.”

He noted that interest rates are still at low levels in both nominal and real terms, money and credit growth is dynamic, and liquidity is “ample by all plausible measures”.

“Against this background, we will exercise strong vigilance so as to ensure that risks to price stability over the medium term do not materialise,” he said.

Trichet said that economic growth has both regained momentum and that harmonised inflation rates are expected to remain above 2% (the ECB’s official upper limit.

“Risks to the outlook for price developments remain on the upside,” he said.

As regards fiscal policy, another rate-rise hint came from the fact that Trichet said that the overall pace of consolidation is “disappointing against the background of the favourable outlook for growth”.

Risks now re-priced

In response to questions, Trichet said that the ECB had diagnosed an “underpricing of risks” in financial markets but the recent developments could be seen as repricing: “that would go in the direction that we had more or less suggested because we were not that happy with the previous very low level of assessment of risks,” he said.