European Central Bank President Jean-Claude Trichet today reinforced market expectations for a rise in euro zone interest rates next month and said the ECB would do whatever was necessary to contain inflationary pressures in 2007.
'I will not contradict market expectations' for a December rate hike, Trichet said after the ECB held its benchmark 'refi' refinancing rate steady at 3.25%.
And quizzed about whether the bank might continue to tighten monetary conditions further in the single currency area next year, Trichet said that 'we will do whatever is necessary' to keep a lid on inflation in 2007. He refused to be more specific.
The ECB has raised its interest rates five times since December 2005, each time by a quarter of a percentage point. The last move was at the beginning of October, bringing the key rate to 3.25%. ECB watchers unanimously expect another quarter-point hike in December.
Trichet was also of the opinion today that euro zone interest rates might need to rise further, if economic growth in the single currency area continues.
With the refi rate currently standing at 3.25%, 'our monetary policy remains accommodative,' Trichet said. 'If our assumptions and baseline scenario continue to be confirmed, it will remain warranted to further withdraw monetary accommodation,' he said.
'Strong vigilance remains of the essence so as to ensure that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability,' Trichet added.
The use of the term 'strong vigilance' is generally interpreted by the financial markets as a signal that the ECB is planning an imminent rate rise.
'Acting in a firm and timely manner remains essential to ensuring price stability over the medium term,' the Frenchman said. Area-wide inflation stood at 1.6% in October, below the ECB's ceiling of 2%. But inflation rates were likely to 'increase again in the next few months and early 2007,' Trichet said.
Despite some anticipated volatility connected with swings in oil and energy prices, 'inflation will remain elevated at a level above 2% on average in 2006 and is likely to remain so in 2007,' the ECB chief said.
'Risks to the outlook for price stability remain clearly on the upside,' he said. Further up the inflation pipeline, upward price pressures also remained, Trichet argued.
The ECB President also said that economic growth in the euro zone is set to continue at a rate of close to 2%.
'Some volatility in quarterly growth rates' could emerge around the turn of the year, mainly reflecting the impact of an increase in indirect taxes in a large euro area country in January 2007,' Trichet said, alluding to the upcoming rise in VAT in Germany.
However, 'investment is expected to remain dynamic, consumption growth should also strengthen over time, in line with developments in real disposable income, as employment conditions continue to improve,' he added.
