Euro zone rates to go up October

The European Central Bank will keep interest rates unchanged at today’s governing council meeting, but ECB president Jean-Claude Trichet is likely to signal that the central bank is preparing to hike rates at the following council meeting on Oct 5, economists said.

The ECB raised rates at its last meeting on Aug 3, and has never previously moved rates at two consecutive meetings, so another move this week would be a major surprise.

Jean-Claude Trichet, the bank’s president, announced significant upward revisions to the ECB’s inflation forecasts for this year and next. He said ‘strong vigilance’ was warranted by the bank to defend price stability – code words used to signal an interest rate increase a month ahead – and expected ‘a progressive withdrawal of monetary accommodation’, which implied more than one rise in borrowing costs was likely.

The ECB left its main interest rate unchanged at 3 per cent. But a quarter percentage point rise is now expected at the bank’s meeting in Paris on October 5. Financial markets have penciled in another quarter point rise by the end of the year.

The ECB aims to keep the annual inflation rate at ‘below but close’ to 2 per cent. Data on Thursday showed euro zone inflation dipping to 2.3 per cent in August, from 2.4 per cent in July. However, fresh ECB forecasts showed inflation in a range with a mid-point of 2.4 per cent in 2006 and the same in 2007.

The ECB moves slowly, in many instances it has moved too slowly but in this case its wise to pause. Trichet has pointed the way forward though, and its up. Managing diverse economies under one banner is difficult, with regions often at different economic cycles – the ECB is, however, giving much better guidance than a few years ago.