| 10.9°C Dublin

Top investor predicts ECB will hold rates at 1pc

PIMCO, the world's biggest bond investor, believes that the European Central Bank (ECB) will hold interest rates at 1pc this year, despite threats of rising inflation.

US-based PIMCO is an influential player in the bond markets. It is a major investor and highly regarded 'thought leader', thanks to its size and a high- profile media presence.

The business manages $1.2bn (€904bn) in assets.

PIMCO analyst Ben Emors yesterday said that the ECB was being forced to walk a fine line between helping boost stability in the bond markets and the bank's fears of rising inflation.

He said the ECB was caught between its own preference to curb inflation, by holding interest rates at 1pc, and the risk of prompting a deterioration of the sovereign debt crisis.

In his view, the bank would opt to leave interest rates unchanged as long as there was a risk that Ireland, Greece or another eurozone country could default.

"Until such time that sovereign default risk is stabilised, the ECB must manoeuvre delicately between the fiscal and monetary corridors. It can only do so if the policy rate remains at 1pc even as it monitors inflation expectations," he said.

Inflation in the eurozone is hovering above the ECB's target rate of 2pc, prompting calls for an interest rate rise to bring rising costs under control.

In 2008, the ECB was quick to raise interest rates when inflation rose by more than expected. According to PIMCO's research, the recent acceleration in inflation in the eurozone would normally have provoked an ECB rate hike.

Earlier this month, ECB president Jean-Claude Trichet signalled his concern about inflation. He said he was prepared to raise borrowing costs if needed.

Yesterday, ECB board member Juergen Stark said the bank was ready to tackle inflation if it rose, but said there was no medium term pressure to act.

PIMCO has been pessimistic regarding the Irish and Greek crisis. Yesterday, Mr Emors said he expected the ECB's forced balance between stability and inflation was likely to remain a central theme for 2011.

Indo Business