Trichet Signals ECB Interest Rate Hike (18/11/2005)
November 19, 2005 at 1:25 am #708249
Nov. 18 (Bloomberg) — European Central Bank President Jean- Claude Trichet said the bank is poised to raise interest rates for the first time in five years to stem inflation in the 12 euro nations. Bonds fell across the region.
The bank’s governing council is ready “to moderately augment the present level of interest rates in order to take into account the level of risks to price stability,” Trichet said in a speech to a banking conference in Frankfurt today. The ECB will “withdraw some of the accommodation which is in the present monetary policy stance,” he said.
Trichet’s comments are the clearest sign yet the ECB will increase the benchmark interest rate from a six-decade low of 2 percent at its next meeting on Dec. 1. Inflation, at 2.5 percent in October, has been at or above the ECB’s 2 percent limit for nine months and economic growth picked up in the third quarter.
“He’s pre-announced a rate hike,” said Holger Schmieding, co-head of European Economics at Bank of America in London “The choice of words points to a 25 basis point rise rather than 50.”
ECB vice-president Lucas Papademos, in a speech in Philadelphia today, said inflation pressures have increased in the countries that share the euro and the bank must be ready to “act promptly and in a pre-emptive fashion if this risk seems to increase.” He spoke at the Wharton European Business Conference in Philadelphia.
“The ECB will be ready to adjust interest rates” as “quickly as this is warranted,” Papademos said.
The euro jumped to $1.1750 from $1.1670 after Trichet’s comments. The yield on the benchmark German two-year bond soared 13 basis points, or 0.13 percentage point, to 2.82 percent at 3:23 p.m. in London. The increase was the biggest since April 2 last year. Bond yields move inversely to prices.
All 19 economists surveyed by Bloomberg after Trichet’s remarks expect the bank to raise the benchmark refinancing rate by at least a quarter point on Dec. 1. In an Oct. 28 survey, only one out of 26 economists predicted an increase.
European politicians and executives want the ECB to wait for more signs economic growth is accelerating before raising rates.
“It’s too soon to have an increase in interest rates in Europe,” Italian Deputy Finance Minister Mario Baldassarri said in an interview in Frankfurt. German Finance Minister-designate Peer Steinbrueck said in an interview Nov. 16 the ECB should keep rates on hold “for as long as possible.”
“It’s a big mistake to raise interest rates now,” said Henri Lachmann, chief executive of Schneider Electric SA, the world’s biggest maker of circuit breakers. “The enemy isn’t inflation, but growth and unemployment.” The euro-region jobless rate is at 8.4 percent compared with 5 percent in the U.S.
Should the bank lift interest rates for the first time since October 2000, it would be following policy makers in the U.S. The Federal Reserve on Nov. 1 raised its benchmark rate to 4 percent from 3.75 percent, the 12th increase since June 2004, to contain inflation and signaled that further increases are likely.
Trichet said today interest rates will “remain accommodative” even after an increase. It is important “to continue solidly anchoring inflation expectations” and preserving confidence in monetary stability will “contribute to sustained growth and job creation in the euro area,” he said.
Commerzbank AG Chief Executive Klaus-Peter Mueller said the fear of higher rates is overblown. “Whether rates are lowered or raised by a quarter of a percentage point won’t stop anyone making a sensible investment,” he said in an interview. “I see the expected rise as a signal the central bank is ready to fight inflation.”
Inflation will average 2.3 percent this year, up from 1.9 percent forecast in April, the European Commission, the executive arm of the 25-nation European Union, said yesterday. It raised the 2006 forecast to 2.2 percent from 1.5 percent, the sixth year the ECB would fail to keep inflation below its 2 percent limit.
“Of course that unsettles us as a central bank,” ECB council member Axel Weber said in an interview today in Frankfurt, when asked about upward revision in the commission’s inflation forecasts. He also said he expects growth in the economy of the dozen euro nations to accelerate next year.
“The debate focuses on what will happen in 2006, whether next year’s growth will accelerate in Europe,” said Lionel Oster, who helps manage more than $120 billion as head of European government bonds at F&C Management Ltd. in London. “That’s the bet the ECB is making.”
Euro region growth will reach 1.3 percent this year, picking up to 1.9 percent in 2006 and 2.1 percent in 2007, the commission said yesterday. The forecast was cut from 1.6 percent for 2005 and 2.1 percent for 2006 due to sluggish growth in the first half of this year.
Euro-region growth accelerated to 0.6 percent in the third quarter from 0.3 percent in the three months through June, Luxembourg-based Eurostat said Nov. 15. Germany’s economy, Europe’s largest, also expanded 0.6 percent from the second quarter.
The commission predicted U.S. growth of 3.2 percent next year, which would mean Europe is set to lag behind the world’s largest economy for the 14th time in 15 years in 2006.
“The next question is when the next hike will come,” Bank of America’s Schmieding said. “We think it will probably be in March. More than 20 basis points is already priced in.”
Yields on European interest-rate futures jumped as much as 13 basis points after Trichet’s comments, indicating traders increased bets the ECB will raise rates as high as 2.75 percent by the end of 2006.
The September Euribor futures contract, which settles to a three-month interest rate that has averaged about 14 basis points more than the ECB’s key rate since the currency’s introduction in 1999, yielded 2.99 percent.
To contact the reporter on this story:
Matthew Brockett in Frankfurt at email@example.com.
Last Updated: November 18, 2005 17:19 EST
I think this was expected, but perhaps not as soon. It was generally believed at one stage rates would not face a hike until late 2006 given the slow but emergining economic recoveries of France and Germany – fears had been expressed about a negative impact on such recovery in the event of a hike.
As for its impact on the Irish Housing market?
With an imminent increase of 0.25% by December 1st 2005 and a further 0.25% hike scheduled for Spring 2006 – the immediate impact, if any, will likely be psychological more than anything else. Will it aid stablising the housing market?
Consider the fact unit completion is set to mildly decrease this year from its 2004 peak, with a further drop in completions predicted for 2006 – it is suspected that completion rates should level off at between 55,000 to 60,000 (give or take in either direction) come year end 2007. This will allowing more stable growth on new units. Regarding existing stock, how the rise will impact current levels of inflation – remains to be seen. All being said, rate increases in the US didn’t seem to have any major impact on the housing market there. :confused:
November 19, 2005 at 1:33 am #763300antoParticipant
and how is this related to architecture exactly?
November 19, 2005 at 1:40 am #763301
and how is this related to architecture exactly?
Rate increases (though perhaps not this hike???) impact on the ability to borrow and hence demand. For many architects day-to-day – demand for their services are affected by movements in this demand. I suppose not all architects are dealing with new gallery designs or office blocks or bridges etc – many earn their living by one-off or multiple housing project commissions. I accept that this post isn’t directly detailling anything specifically regarding architecture as a topic – but for many of the architects and associated persons that use the forum, I thought the topic was of relevance to them given that such movements can affect their livelihood. 😮
It doesn’t need to be debated or anything, but I just thought it may be an interesting piece of information for them to update on. Or for users living abroad not aware of progressions such as this back home.
November 19, 2005 at 4:32 am #763302
November 19, 2005 at 10:54 am #763303corcaighboyParticipant
Very true Graham.
But higher costs lead to cutbacks elsewhere, and architects’ grand designs get binned, or at least curtailed. Or worse, projects go on hold, so less work for everyone…now that is a ripple effect!
In Hong Kong, where admittedly the property market resembles more the behaviour of a casino, a 1-2% swing in rates quickly turns boomtown into slumptown.
Given that most of the boom in development and sales is fuelled by cheap credit, it would be interesting to know where the inflection point is and things go pear-shaped. I live overseas but quite a few of my mates back home have 2 to 3 houses and are fully leveraged. Who said the paddies are afraid of risk!!
November 19, 2005 at 6:03 pm #763304Graham Hickey wrote:Developers you mean ]
Well it’s all related really Graham, I suppose you have to consider where architects get their business – homeowners, developers, councils, research bodies etc etc – if money supply is tighten, a decrease it demand usually follows (as a general rule of economics). One affects the other and architectural business volumes are just as prone to changes in the cost of borrowing as any other business, including developers. A change in professional title does not guarantee immunity. But that said, I was just throwing this bit of information up there for persons who may be interested – i.e. propsective homebuyers and the like. I don’t think the December and Spring hikes will have any dramatic impact on activity and clearly when I reference the above impacts on business I am considering a much more severe hike scenario. I’ll leave it at that I suppose. 🙂
I’m glad we are still in a position to be able to promote stronger architectural values in this country – as I’ve said before, its a bar that must be continually pursued.
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