ECB retains rate hike bias as euro, oil hit highs

Echoing comments made last week by European Central Bank chief Jean-Claude Trichet, the bank said in its monthly bulletin that credit growth was strong and described monetary policy as on the “accommodative side,” adding that inflationary pressures remained on the upside. While annual eurozone inflation stood at 1.8% in August, ECB said in its bulletin it expects inflation to overshoot the bank’s 2.0% target during the rest of the year.
The release of the Frankfurt-based bank’s latest bulletin came against the backdrop of a soaring euro and high energy prices which have added to market jitters.

While oil prices continued to hover at just under the $80 a barrel record they hit on Wednesday, the euro surged to a record high, touching $1.3921 in European trading Thursday after breaching a previous record on Wednesday. Some analysts believe that the euro could soon sail past $1.40 as fears set in about dwindling US economic growth and the outlook for corporate profits.

The euro’s seemingly endless rise follows analysts’ expectations that the US Federal Reserve will cut interest rates next week by up to 50 basis points in a bid to ramp up the weakening American economy. But at the same time, the common currency’s climb also raised concerns that the euro’s strength will hit the eurozone’s key export machine and as a result dampen growth in the currency bloc. However, a recent round of market turmoil unleashed by the US housing industry crisis forced the ECB’s 19-head rate-setting council to step back from a rate rise which it had signaled for last Thursday and to hold its benchmark refinancing rate at 4.0%.

But while the ECB joined several central banks around the world in stepping back from tightening monetary policy, one of the Europe’s leading central banks, the Swiss National Bank (SNB), on Thursday raised the cost of money by 25 basis points to head off inflationary pressures. It was the SNB’s rate eighth rise since December 2005 and resulted in an increase in the three-month Libor rate range to 2.25-3.25%. Announcing the rate hike the SNB indicated that it was confident about Switzerland’s growth outlook but warned that continuing market turbulence could dampen the nation’s economic expansion rate.

In commenting on the market turmoil, Thursday’s ECB bulletin said that “financial market volatility and reappraisal of risk of recent weeks have led to an increase in uncertainty. Given this high level of uncertainty, it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy in the context of the ECB’s medium- term-oriented monetary policy strategy aimed at delivering price stability.”

Speaking earlier this week at the European Parliament’s monetary and economics committee, Trichet also again called for greater transparency in the financial system, criticizing ratings agencies and investment funds following the market turbulence that sent world share prices tumbling. (m&c.com)