ECB rate hikes on cards in anti-inflationary move
Friday October 30 2009
THE European Central Bank (ECB) will have to start raising interest rates before employment picks up in the eurozone, in order to prevent inflation, German Bundesbank president and council member Axel Weber said yesterday.
But a rise in borrowing costs is still some way off, Mr Weber signalled, in one of the most detailed comments so far on the difficult task of withdrawing central bank stimulus to banks and the economy.
He indicated that the first step would be to start scaling back long-term ECB loans to the banks, which are part of the emergency stimulus measures.
The ECB has been lending banks as much money as they want for up to 12 months since the collapse of Lehman Bros last October.
Mr Weber said the withdrawal of emergency liquidity was likely to play an important role next year and indicated it may precede interest-rate increases, which will come when the ECB sees risks to price stability.
"We won't wait until employment picks up or unemployment rates fall to tighten," Mr Weber said.
"That would definitely be too late. Our monetary policy must be ahead of the curve, not behind."
Interest rates on German two-year loans rose after Mr Weber's remarks, indicating that traders thought they indicated a longer period of low interest rates than they had been betting on.
Risk
Analysts at Capital Economics said yesterday that deflation, not inflation, remained a threat to the euro-area economy and a particular risk in Ireland and Spain.
Germany and France appeared to be in the least danger of deflation, Capital's European economist Ben May said. "There is a significant chance that the region may suffer from large and prolonged divergences in economic performance.
"Not only would this provide the ECB with an additional headache over the timing of the withdrawal of its stimulus measures, but it could even prompt the worst affected currencies to consider abandoning the single currency," he said.
There were signs of that divergence yesterday as the Bank of Spain estimated that the country's GDP fell 0.4pc in the third quarter, leaving it 4.1pc down in the year.
But other figures showed European factories increased capacity usage for the first time in two years; confidence in the economic outlook rose to the highest in 12 months; and German unemployment showed a surprise drop to 8.1pc. (Additional reporting by Bloomberg)
- Brendan Keenan
Irish Independent
