The European Central Bank is not set on raising rates in September, and its recent reference to its 2 August policy statement was intended to keep options open, national central bank officials said today.
The ECB said it is focusing on current financial market turbulence, which will be the decisive factor in determining whether it raises rates by a quarter percentage point to a six-year high of 4.25%.
'If there is a normalisation in the markets a rate hike is still possible. If not the ECB will wait with the next step,' said a senior official at a euro zone national central bank.
The credit squeeze on financial markets has worsened since 2 August, when ECB President Jean-Claude Trichet said that 'strong vigilance' was needed on inflation, language the ECB has used the month before all rate increases in its current cycle.
But since then the ECB has intervened repeatedly in euro interbank lending markets to lower soaring commercial interest rates - a consequence of a global surge in risk aversion due to the US subprime mortgage crisis.
This prompted markets to lower the odds of an ECB rate rise in September to about 20%, only for the probability to leap back above 50% when the ECB referred back to its 2 August on Wednesday.
As part of an announcement that it would hold its first-ever emergency injection of three-month funds, the ECB said: 'The position of the Governing Council of the ECB on its monetary policy stance was expressed by its President on 2 August 2007.'
Many economists interpreted this as a signal that the ECB still intended to raise interest rates next month.
That interpretation is wrong, the national central bank official said today.
A leading economist today said that the recent turbulence on stock markets has 'transformed' the outlook for interest rates.
Bank of Ireland economist Dr Dan McLaughlin said the European Central Bank was unlikely to increase euro zone interest rates next month, despite recent signals. He said interest rates had reached a peak.
The economist said US interest rates look set to fall by mid-September at the latest, adding that he would be surprised if the cut were not a half-point move. Dr McLaughlin also said the Bank of England was unlikely to raise rates again.
He explained that recent concerns about US mortgage defaults and their effect on the wider financial system had sparked a credit crunch, with banks unwilling to lend into wholesale money markets for periods longer than a few days. This had led to a surge in the interest rates which banks charge each other.
'This cannot be allowed to continue for an extended period as it will transfer to higher borrowing costs for retail borrowers' he said, adding that lending to consumers was already slowing.
