Financial markets’ expectations of a quarter percentage point increase in March were “reasonable”, Mr Trichet said. Stressing the ECB’s “vigilance” – regarded as code for an interest rate rise in the offing – he warned that eurozone inflation was rising and risks to price stability were “on the upside”.
However, Mr Trichet offered no guidance about whether further increases in borrowing costs would follow later this year.
Mr Trichet’s comments after a rate-setting meeting in Frankfurt yesterday highlighted the ECB’s worries about the damaging effects of interest rates that remain at a historical low, despite December’s quarter percentage point rise to 2.25 per cent. The central bank believes the eurozone recovery is continuing, but Mr Trichet underlined the “downside risks” to economic growth, including from higher oil prices.
Recent economic data have sent confusing signals, which may have underpinned the ECB’s decision not to commit itself to further interest rate increases after March. Despite upbeat business confidence surveys, German economic growth is thought to have slowed significantly at the end of last year, with consumer spending falling.
Eurozone inflation figures for January released today are forecast to show an acceleration from December’s annual rate of 2.2 per cent, possibly as high as 2.4 per cent, largely as a result of higher oil prices. The ECB aims to keep inflation “below but close” to 2 per cent.
Mr Trichet said economic activity in the 12-country region had started to broaden in the second half of last year, and “it appears that this process has basically continued, taking into account the usual degree of volatility of quarterly growth rates”.
He argued that an export led recovery would normally be followed by a recovery in investment, which had emerged in mid-2005, and eventually feed through into consumption. Economic forecasters were expecting “a progressive pick up in consumption . . . but we will see”.
Business confidence in Germany, the eurozone’s largest country, is soaring, reflecting the strength of exports and the effectiveness of measures to restore the country’s international competitiveness.
However, the evidence about the effects of Germany’s industrial comeback on the labour market, and thus consumer spending, is mixed. Surveys suggest that businesses are recruiting but official, seasonally adjusted unemployment figures this week showed a surprise rise and the unadjusted total rose above the symbolic 5m level. Moreover, wages remain under acute downward pressure, curbing consumer spending.
Lorenzo Bini Smaghi, the newest ECB executive board member, told a German newspaper last month: “German growth cannot continue indefinitely on the basis of its exports alone. At some point private consumption has to pick up.” He suggested – controversially in some Frankfurt circles – that wage rises “should be in line with productivity growth”.
At the same time, there is evidence that French companies, more exposed to slower growing export markets in the eurozone, are failing to keep pace with their German rivals.
By its next rate-setting meeting on March 2, the ECB’s governing council would have seen gross domestic product figures for the fourth quarter of 2005 and also updated ECB forecasts for eurozone growth and inflation.
