ECB may have to shelve rate hike
Source: Agencies |
August 3, 2011, Wednesday
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Print Edition
Print Edition
WORRIES about Europe's economy and a possible worsening of the debt crisis could force the European Central Bank to abandon a third interest rate increase that had been widely predicted for later this year.
No change is forecast in the bank's key rate of 1.5 percent at tomorrow's meeting of its governing council, but remarks by President Jean-Claude Trichet will be scrutinized for any darkening of the bank's risk assessment.
Until recently, many analysts expected the bank would hike rates by a quarter-point in October to keep inflation from taking hold, following increases in April and July.
Some analyst now say that more hikes may have to wait, in the face of a string of downbeat economic signals.
CEOs of German companies such as Siemens, Volkswagen and BASF gave cautious earnings predictions last week, while key economic indicators, such as Monday's manufacturing sector surveys, are sagging both in Europe and the United States.
Markets have also been shaken by the debt crises both in Europe and the US.
Investors are demanding elevated interest rates on Italian and Spanish government bonds, suggesting a second bailout for Greece, agreed on July 21 by eurozone leaders working with Trichet, has not eliminated the debt crisis and the risk that it could spread beyond bailout recipients Greece, Ireland and Portugal.
The US, meanwhile, narrowly avoided defaulting on its debt when Congress voted on Monday to raise its debt ceiling. The uncertainty, however, has rattled markets as a downgrade seems unavoidable and growth is expected to slow.
The combination of troubling economic indicators could lead the bank to pause further rate hikes, since interest rate increases can weigh on growth if they hit an economy that is not expanding strongly. Higher rates are central banks' chief way to tame inflation.
"The window of opportunity for further rate hikes seems to be closing faster than expected," said Carsten Brzeski, senior economist at ING in Brussels. "The latest batch of confidence indicators has again fueled doubts about the strength of the eurozone economy."
The manufacturing surveys showed a slowdown in activity in Germany and the Netherlands, two countries that have enjoyed good growth even during the debt crisis, while Italy, the No. 3 eurozone economy, was stagnant.
Those numbers followed cautious or downbeat outlooks on the future last week from top European companies, including big German industrial firms that have been riding a boom in exports in recent quarters.
Some economists who follow the ECB think it will still carry through with at least one more rise this year.
No change is forecast in the bank's key rate of 1.5 percent at tomorrow's meeting of its governing council, but remarks by President Jean-Claude Trichet will be scrutinized for any darkening of the bank's risk assessment.
Until recently, many analysts expected the bank would hike rates by a quarter-point in October to keep inflation from taking hold, following increases in April and July.
Some analyst now say that more hikes may have to wait, in the face of a string of downbeat economic signals.
CEOs of German companies such as Siemens, Volkswagen and BASF gave cautious earnings predictions last week, while key economic indicators, such as Monday's manufacturing sector surveys, are sagging both in Europe and the United States.
Markets have also been shaken by the debt crises both in Europe and the US.
Investors are demanding elevated interest rates on Italian and Spanish government bonds, suggesting a second bailout for Greece, agreed on July 21 by eurozone leaders working with Trichet, has not eliminated the debt crisis and the risk that it could spread beyond bailout recipients Greece, Ireland and Portugal.
The US, meanwhile, narrowly avoided defaulting on its debt when Congress voted on Monday to raise its debt ceiling. The uncertainty, however, has rattled markets as a downgrade seems unavoidable and growth is expected to slow.
The combination of troubling economic indicators could lead the bank to pause further rate hikes, since interest rate increases can weigh on growth if they hit an economy that is not expanding strongly. Higher rates are central banks' chief way to tame inflation.
"The window of opportunity for further rate hikes seems to be closing faster than expected," said Carsten Brzeski, senior economist at ING in Brussels. "The latest batch of confidence indicators has again fueled doubts about the strength of the eurozone economy."
The manufacturing surveys showed a slowdown in activity in Germany and the Netherlands, two countries that have enjoyed good growth even during the debt crisis, while Italy, the No. 3 eurozone economy, was stagnant.
Those numbers followed cautious or downbeat outlooks on the future last week from top European companies, including big German industrial firms that have been riding a boom in exports in recent quarters.
Some economists who follow the ECB think it will still carry through with at least one more rise this year.
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