Trichet Signals Further ECB Rate Increase

European Central Bank President Jean- Claude Trichet signaled he may raise interest rates again in coming months and will ease Portugal’s access to emergency funds as officials battle both faster inflation and the debt crisis.

The ECB increased its benchmark rate by 25 basis points to 1.5 percent today, the second increase in three months. The decision on Portugal came after Moody’s Investors Service sparked a renewed selloff in euro region bond markets, saying on July 5 the country may need a second bailout package.

“Our monetary policy stance remains accommodative,” Trichet said at a press conference in Frankfurt. “It is essential recent price developments do not give rise to broad based inflation pressures over the medium term.”

Policy makers are trying to balance the risks of further turmoil in debt markets against the danger that Germany’s export-led recovery will fuel a wage-price spiral. While the yield on Greek, Irish and Portuguese two-year bonds all exceed 15 percent, inflation across the region has breached the central bank’s 2 percent limit for the past seven months.

Trichet said the ECB will suspend its minimum credit-rating threshold on Portuguese bonds after Moody’s lowered the country’s debt to junk. The suspension will be maintained “until further notice,” he said. This follows the ECB waiving minimum threshold for Greek and Irish bonds.

Photographer: EyesWideOpen/Getty Images

Weaker growth may help curb price pressures and prompt the ECB to raise interest rates less aggressively than investors and economists initially estimated, said Julian Callow, chief European economist at Barclays Capital in London. Close

Weaker growth may help curb price pressures and prompt the ECB to raise interest rates... Read More

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Photographer: EyesWideOpen/Getty Images

Weaker growth may help curb price pressures and prompt the ECB to raise interest rates less aggressively than investors and economists initially estimated, said Julian Callow, chief European economist at Barclays Capital in London.

Portuguese Plan

“The Portuguese government has approved an economic and financial adjustment program which has been negotiated with the European Commission, in liaison with us, and the International Monetary Fund,” he said. “The Governing Council has assessed the program and considers it appropriate.”

The euro erased its decline against the dollar after Trichet’s remarks and traded at $1.4324 as of 3:12 p.m. in London, little changed since yesterday. European stocks rose to a one-month high, with the Stoxx Europe 600 index surging as much as 1.1 percent to 278.01. The Stoxx 50 gained 0.9 percent.

European bond yields have risen to a record on renewed concern that the debt crisis is spreading across the region. Trichet is at odds with European leaders over how to contain the debt crisis, saying it’s up to nations to plug budget gaps as policy makers fight price gains.

“I have a lot of questions on Ireland, Portugal, Greece,” Trichet said in response to reporters at the press conference today. “Shall I remind you that we’re responsible for price stability for the euro area as a whole. Those issues which you’re addressing constantly should be addressed to governments, they’re responsible.”

Default Risk

European finance ministers earlier this month authorized an 8.7 billion-euro ($12 billion) loan payout to Greece in an attempt to avert the region’s first sovereign default. Standard & Poor’s and Fitch Ratings have both indicated they would cut Greece to default if leaders went ahead with a plan to ask creditors to roll over expiring Greek bonds into new debt.

“We say ‘no’ to selective default or credit event,” Trichet said. He declined to comment on whether the ECB would use its own judgment or rely on ratings companies to determine if there is a default.

Trichet also said that inflation, which was 2.7 percent in June, is likely to remain above the ECB’s 2 percent ceiling in the coming months. He declined to say whether today’s decision is the beginning of a rate-hiking cycle, saying the central bank is never “pre-commited” on decisions.

‘Door Open’

Trichet’s statement “leaves the door open to more hikes,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. While Trichet’s language may hint at an increase in September, the ECB could also wait until the following month, he said.

The Bank of England kept borrowing costs at 0.5 percent in London today. In Sweden, the Riksbank raised its benchmark repurchase rate to 2 percent on July 5, the seventh increase in a year. The People’s Bank of China yesterday raised key rates for the third time this year.

While leaders are still seeking ways to fight the crisis, Europe’s recovery is already losing momentum. Services and manufacturing growth slowed more than estimated in June and economic confidence weakened. In Germany, Europe’s largest economy which has powered the region’s recovery, investor sentiment dropped to a 2 1/2-year low last month.

“As expected, recent economic data indicate some deceleration in the pace of economic growth in the second quarter,” Trichet said. “While the underlying momentum of economic growth in the euro area continues to be positive, uncertainty remains elevated.”

The ECB last month forecast euro-region growth to slow to 1.7 percent next year from 1.9 percent in 2011. The inflation rate may fall below its 2 percent ceiling in 2012, averaging 1.7 percent, the central bank estimated.

Trichet was a “little bit dovish on the growth outlook,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. Still, “it is obvious that the ECB has further to go, there will be one more rate hike at least this year.”

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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