The next European Central Bank interest rate rise is at least a month away, analysts said as ECB policymakers met in Finland yesterday after Portugal became the third eurozone country to accept a rescue.
Rising inflation will probably lead to higher lending rates in June or July, but the ECB’s current benchmark of 1.25 per cent looked safe for now as €78 billion in loans for Lisbon spotlighted the eurozone’s debt woes.
Economists are divided on how high the main interest rate could climb this year, but generally put the ceiling at 1.75 to two per cent.
In Portugal, experts from the International Monetary Fund, the European Union and the ECB were to present details of the eurozone’s latest financial rescue package.
EU officials hope that by throwing a lifeline to the last of three seriously threatened peripheral eurozone countries, the others being Greece and Ireland, they can keep the crisis from spreading to a much bigger member, Spain.
The ECB governing council, after one of its rare meetings outside the bank’s headquarters in Frankfurt, will likely comment on the agreement and try to keep markets from testing Madrid with steeper borrowing rates for private equity.
At Barclays Capital, chief European economist Julian Callow told AFP the initial market response had been positive.
“The concerns that are out there about Europe’s ability to deal with the issues that exist in particular parts of Europe are taken care of by programmes such as this one that’s just been agreed,” he said.
Meanwhile, the ECB is striving to pull monetary policy for the 17-nation bloc back towards normal, by slowly returning interest rates to pre-crisis levels and unwinding exceptional measures taken during the financial meltdown.
Some commercial banks have become dependent on unlimited and cheap ECB funds to stay afloat and another step towards normal conditions would be to strengthen the banking sector, which now faces a second round of stress tests.
Inflation fuelled in large part by higher oil prices has hit 2.8 per cent according to the latest EU estimate, forcing the ECB to raise rates even though that drives the value of the euro higher, now above $1.48, and makes life harder for eurozone exporters.
It also puts pressure on eurozone governments that are struggling to pay their debts.
The Bank of England was expected to maintain its main rate at 0.50 per cent yesterday, while the US Federal Reserve’s Fed funds rate is essentially zero, so higher eurozone rates spur demand for the euro as investors seek higher returns.
To know just when the ECB will raise its rates, analysts are waiting to hear President Jean-Claude Trichet say the council will remain “vigilant” with respect to inflation pressures, a code word that a rate hike is in the pipeline.
“In ECB parlance ‘vigilant’ should be translated by ‘we plan to hike at the next meeting’,” UBS economic research head Stephane Deo said, before adding that he thought Mr Trichet would say that the bank remained “alert.”
That could be upgraded to “vigilant” next month to signal a rate hike in July.
Analysts at the Italian bank UniCredit wrote in a research note that “we expect the ECB to keep the ‘very close monitoring’ wording, which would signal no rate hike until July”.
Recent eurozone data suggests the economy might be headed for a slowdown, which could give the central bank a reason to hold off on its next increase while it deals with the debt crisis.
EU leaders are trying to dampen mounting market speculation that Greece will have to restructure its debts, and bolster confidence in their responses to the eurozone’s problems.