EU Economy
European Central Bank expected to raise benchmark rate to 1.25%
By Finfacts Team
Apr 7, 2011 - 6:43 AM

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Sharon Bowles MEP, chair of the European Parliament's Economic and Monetary Affairs Committee, with Jean-Claude Trichet, president of the European Central Bank, Brussels, March 22, 2011.

The European Central Bank (ECB) is expected today to raise its benchmark interest rate from a record low of 1% to 1.25%.

The expected move would be to first rise since July 2008, when the rate was hiked to 4.25% and subsequently cut in a series that ended at 1% in May 2009.

Trichet flagged the move on March 3 when he warned that "strong vigilance" was needed on inflation. At his press conference, he said a possible rate this month is "certainly not the start of a series.”

On March 18, asked by reporters as he arrived at a speaking engagement whether he had anything to say with respect to his posture of strong vigilance, Trichet replied:
"I stick to what I had said before. I have nothing to add, nothing to withdraw, absolutely nothing. No new message at all."

Eurozone annual inflation hit 2.6% in March compared with the ECB's target of "below but close to 2%."

We reported yesterday that Deutsche Bank economists say recent rising inflation rates appear to be grist to the mill of those who regard a substantial acceleration of inflation as inevitable in view of skyrocketing sovereign debt and ballooning central bank balance sheets in the industrial countries. However, the economists believe these arguments ignore the decrease in the credit multipliers, the changed role of central banks and the absence of money illusion.

Royal Bank of Scotland economist Nick Matthews has devised what he terms a "traffic light" system to interpret Trichet's warnings:

Strong vigilance: If Trichet uses "strong vigilance," it suggests another rate increase in a month's time.

Monitor very closely: If Trichet uses this phrase, a June rate rise is likely.

Monitor closely: This would signal a more relaxed stance on future moves.

The ECB announcement will be made today at 1:45 pm in Frankfurt and 12:45 pm in Dublin.

ECB rate hike expected:

Overflow form rate hike not good:


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