Eurozone debt crisis rumbles on

Economists debate ECB's next rate hike

GMT 17:13 2011 Wednesday ,04 May

Arab Today, arab today Economists debate ECB's next rate hike

Economists are divided over how high the ECB's main interest rate could rise

Economists are divided over how high the ECB's main interest rate could rise Analysts agree the European Central Bank will keep its key interest rate at 1.25 % Thursday but differ on when the next hike will be, though all say it will come once the ECB utters the "V" word. "'Vigilance' remains the only magic code word," ING senior economist Carsten Brzeski said, a view shared by all as the bank's governing council prepared their meeting in Helsinki.
RBS analysts said: "We expect ECB president (Jean-Claude) Trichet to use the phrase 'strong vigilance' at Thursday's meeting to signal the governing council will raise rates at the June meeting."
For Citi economist Juergen Michels, "it is a close call if the next move will be in June or July," but in either case would be signalled by use of the phrase "strong vigilance" with respect to inflationary pressures.
Economists are also divided on how high the main interest rate could rise this year, but generally put the ceiling at 1.75 to 2.0 %.
The ECB raised its main lending rate in April for the first time since July 2008 to counter inflation pressures that have risen as the 17-nation eurozone economy grows and oil prices climb worldwide.
If expectations that prices will continue to rise begin to fuel core inflation, the central bank will be determined to show it will keep prices in check by normalising rates to pre-financial crisis levels.
More rate hikes will push the euro higher in value against other major currencies, which could help buffer against rising oil prices set in dollars but raise hurdles to exports from weaker eurozone countries.
On Tuesday, the euro traded between 1.48 and 1.49 dollars, as traders do not expect the US Federal Reserve to raise its own benchmark lending rate from close to zero for the time being.
In London, the Bank of England is tipped to keep its own rate at 0.50 % on Thursday as the British economy strives to expand.
But within the eurozone, inflation now stands at 2.8 % according to the latest official estimate, well above the ECB's target of just below 2.0 %.
The purchasing manager's index for the eurozone manufacturing sector was revised up to 58.0 in April from 57.7 meanwhile, a reading "consistent with above-trend economic growth," noted Berenberg Bank economist Holger Schmieding.
The eurozone debt crisis is also rumbling along however, with markets asking when, not if, Athens will restructure its heavy debt, and banks in peripheral countries like Greece, Ireland and Portugal still dependent on ECB funds.
A recent bank lending survey by the ECB has also come in on the soft side, suggesting growth could taper off this year, and stress tests to be released in June might raise questions about the health of some commercial lenders.
The central bank might thus want to readjust some of the exceptional measures it took amidst the financial and economic crises before proceeding further with classic interest rate hikes.
The question of who will succeed Trichet as head of the ECB appears to have been all but settled however, with an expression of French support for Italian central bank governor Mario Draghi.
If officially named by EU leaders in June, Draghi would be the third ECB president after the late Wim Duisenberg of the Netherlands and Trichet of France, who steps down in October.

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