European Central Bank President Jean-Claude Trichet said interest rates in the 13-nation euro region are still “low” after six increases since the start of December 2005, indicating a further move in coming months.
“Acting in a firm and timely manner to ensure price stability in the medium term is warranted,” Trichet today at a press conference in Frankfurt. “Very close monitoring” of the inflation outlook is “of the essence,” said Trichet after ECB policy makers left the key rate unchanged at 3.5 percent.
Economists and investors are raising ECB forecasts as the pace of economic growth and money-supply expansion threatens to fuel inflation in the 13-nation euro region. UBS AG last week said the Frankfurt-based central bank will increase the key rate to 4.25 percent this year. Futures trading indicates investors expect two quarter-point increases by September.
In the U.K., the Bank of England today unexpectedly lifted its key rate by a quarter point to 5.25 percent.
With Germany’s IG Metall labor union demanding pay increases at more than triple the rate of inflation and money supply in the euro region expanding at the fastest pace in 16 years, Trichet may not be able to hold out for much longer.
IG Metall has said it will seek pay increases of as much as 6.5 percent for their workers in the talks, which traditionally set a benchmark in Germany.
Higher wages helped trigger the Bank of England’s decision to raise its key rate, its third increase since August, after policy makers said inflation may accelerate above its target.
The ECB has raised interest rates six times since December 2005, each time by a quarter of a percentage point.
Analysts believe that all the ingredients for further increases are there, with area-wide growth set to remain firm in 2007 and inflation higher than the ECB would like.
Some ECB watchers believe the euro bank might wait until March before tightening monetary conditions in the 13 countries that share the euro still further, so as to better gauge the economic effects of the three percentage-point rise in value-added or sales tax (VAT) to 19 percent in Germany.
The VAT increase is expected to boost headline inflation in the eurozone’s biggest economy and put a brake on household consumption, which has only recently started emerging from the doldrums.
However, gross domestic product GDP data published on Thursday showed that the German economy grew by 2.5 percent in 2006, its strongest growth rate since 2000. And while the German growth momentum might slow temporarily in the first few months of this year as a result of the VAT rise, the upward trend is going to remain intact, analysts said.
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