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European Central Bank President Jean-Claude Trichet at a press conference in Frankfurt, April 07, 2011.
European Central Bank President
Jean-Claude Trichet told a press conference in Frankfurt today following the
decision of the governing council to hike the benchmark rate by 0.25% to 1.25%,
that no decision was made that the rise would mark the first of a series. He
stressed that the central bank will not accept second round effects.
The president said it is of
"paramount importance" to avoid second-round inflationary effects - - this
is where the current spikes in oil and food prices trigger demands for
compensatory pay and other cost rises.
"We will continue to monitor very closely all developments with respect to
upside risks to price stability," he said and added: "We did not decide
that it was the first of a series of interest rate increases. But you know from
our own doctrine from the past, you know that we always do what we judge
necessary to deliver price stability in the medium term. So I confirm that we
will do all that is necessary to deliver price stability."
On Ireland, Trichet was asked about advice to the Irish Government on avoiding
haircuts on senior bondholders, while he did not answer the question directly
but he said it was essential for Ireland to return to normal market funding and
that will only happen with a return of confidence.
"We have a number of
countries which have to correct their situation and particularly as regards
their situation in the fiscal side. But not only the fiscal side, also the
economic policies in general. And plans are in place in some countries and they
have, in our view, to apply the plan," he said.
A reporter asked about the impact of today's rate rise on struggling Ireland.
He said the governing council sets policy for 331m people and
"it is in the interest of all members and partners of the single market with a
single currency that we maintain maximum credibility for the anchoring of
Today's rate rise will result in
an additional €15 per month for every €100,000 of a 20-year term mortgage.
A €300,000 30-year loan on a variable rate of 4.25% would
see a monthly rise of €43.57 while in respect of every €100,000 owed on a 30-year tracker mortgage of 1.5% plus the ECB rate, will add €13 to the monthly repayments.
Bank of Ireland and ICS Building
Society announced they will increase their fixed rate mortgages by between 0.7%
and 1.3%, effective from next week. Tracker mortgages will also rise in line
with the ECB increase.
Tracker loans account for about 60% of the Irish residential mortgage market and
banks have been losing money at the low rates since 2007.
Marie Diron – Ernst & Young
Eurozone Economic Forecast (EEF) chief economist,
comments: "The ECB's decision to raise rates by 25
basis points was no surprise after last month's announcement and recent
statements by ECB officials. The ECB is concerned that the commodity-fuelled
inflation rates spread to a wider range of goods and services and eventually to
wages. The rate increase is probably also aimed at preserving the ECB's
credibility as a central bank focused on keeping inflation low. We think that
tightening monetary policy already is a mistake.
For Ireland, higher rates will
only prolong the crisis of the housing and construction sectors. We think that
the risk to our forecast of a moderate further fall in house prices this year
are on the downside.
In our Spring EEF forecast for Ireland, shows that, at 15%, the country’s full
year 2011 unemployment forecast levels is 50% greater than the Eurozone average.
The impact of this significantly weakened labour market will continue to have a
drag effect on overall economic growth with EEF predicting a decline in GDP by
2.3% in 2011 – almost three times greater than the 2010 decline (-0.8%).
Households in particular
are taking a major hit with rising unemployment, downward wage pressures and
austerity measures damaging disposable incomes. Today’s announcement will only
add to this pressure.
Wider Eurozone impact
True, for some countries and in
particular for Germany, a normalisation of monetary policy is warranted. But as
Mr Stark reminded us recently, the ECB should not set monetary policy for a few
specific countries. Its task is to look at the Eurozone as a whole. And for the
Eurozone, risks of inflation becoming entrenched are very low, if significant at
With unemployment rates in double digits in many countries and expected to stay
high for some time, it is difficult to see how employees would be able to claim
higher wage increases as a compensation for inflation.
EEF, and the ECB itself in its March forecast, expect inflation to come back
down next year once the commodity and VAT effects disappear. Instead, higher
inflation will compress real wages and thereby consumption. And a long list of
downward risks loom on the Eurozone, from an escalation of tensions in the
Middle East and North Africa, to long-lasting major disruptions in Japan, to a
more negative impact of fiscal restructuring in the Eurozone than currently
envisaged. And the risk of a full-blown Eurozone sovereign debt crisis still
The reforms agreed upon at the end of March offer no solution to this crisis.
Instead, negative news keeps coming from Portugal, Greece and Ireland,
unsettling investors' nerves even more.
Tighter monetary policy will only add to the burden of reeling peripheral
countries and increase the risk of a much worse debt crisis. Portugal asking for
a bailout from the EU and IMF illustrates that this crisis is far from over. We
hope that this rate hike is not the start of a series of rate increases that
would seriously endanger the fragile recovery."
Reacting to the ECB's
decision to raise its interest rate to 1.25%, business the group, IBEC, said
that while an additional rate increase was likely this year, monetary policy in
the second half of the year and into 2012 would depend on trends in commodity
prices and the stability of the euro and global economic recovery.
Commenting on the CSO figures, IBEC senior economist Reetta Suonperä said:"Inflation accelerated to 3% in March.
Crucially, the EU harmonised index, which excludes mortgage interest, showed
that core price pressures in the Irish economy remain fairly muted. Inflation on
this measure was 1.2% in the year.
"Increased inflation will eat into consumers' disposable incomes, weakening
domestic demand this year. However, the current spike may prove relatively short
lived, as underlying inflation pressures in Ireland, and indeed the eurozone,
Commenting on the ECB's interest rate decision, Ms Suonperä said: "The increase
should not be seen as the first step in a long series of rate hikes. Although
headline inflation is above the ECB's 2% target, core inflation remains muted
and there have been few signs of the so-called second-round effects, where
higher oil prices feed into wage demands and the general price level.
"The ECB has moved before the Bank of England and the Fed. This more hawkish
stance from the ECB will add upward pressures on the euro exchange rate. To
counteract the negative impact of the stronger exchange rate on Irish exporters,
Government must do more to bring down the cost of doing business. Unfortunately,
the rate increase will hit hard pressed householders and adds a further headwind
to the outlook for consumer spending this year."
Jim O'Neill, chairman Goldman Sachs Asset Management told CNBC he thought an ECB rate hike was premature. The crisis in Europe was not so much a debt crisis as a crisis of governance and leadership of the European monetary union, he said: