Trichet Signals No Rush to Raise Rates With Inflation Above 2%

European Central Bank President Jean-Claude Trichet signaled no immediate plans to raise interest rates even though the bank expects inflation to stay above its 2 percent limit for longer than it predicted just three weeks ago.

Trichet said the ECB’s benchmark rate, which it left at a record low of 1 percent today, remains “appropriate” and despite “short-term upward pressure,” inflation risks are balanced. The euro fell more than a cent against the dollar as investors pared expectations for an increase in borrowing costs.

“For now they are prepared to look through the inflation hump,” said Julian Callow, chief European economist at Barclays Capital in London. “Unless inflation expectations move up abruptly, the ECB will probably maintain its accommodative stance to help Europe to patch itself together again.”

With Europe still struggling to contain its sovereign debt crisis, Trichet may be trying to temper investor expectations for higher ECB rates after his change in tone on inflation last month caused a five-cent surge in the euro. He said on Jan. 13 that the ECB will raise borrowing costs if needed to contain inflation, which has accelerated to 2.4 percent, the fastest in more than two years.

The euro fell 1.3 percent to $1.3628 at 5 p.m. in Frankfurt today and Eonia forward contracts fell across the curve, indicating investors are pushing back expectations for higher ECB rates.

‘Right’ Interpretation

“The market has rightly interpreted Trichet’s comments as a sign that the prospect of a near-term rate hike is still premature,” said Frederik Ducrozet, an economist at Credit Agricole SA in Paris. “That said, it is very likely, in our opinion, that the ECB staff of economists will revise growth and inflation projections upward next month.”

Political tensions in Egypt are stoking oil prices, and in Germany, where the economy is booming and import-price inflation is running at the fastest pace in 29 years, workers are demanding bigger pay increases.

In his official policy statement today, Trichet changed the wording on the inflation outlook.

“Inflation rates could temporarily increase further and are likely to stay slightly above 2 percent for most of 2011, before moderating again around the turn of the year,” he said. Last month, Trichet said inflation would moderate “towards the end of the year.”

Still, he reiterated today that “this has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon.”

‘Rate-Hike Expectations’

“Financial markets had built in significant rate-hike expectations in the days leading up to the meeting,” Nick Kounis, head of macroeconomic research at ABN Amro Bank NV in Amsterdam, said in a note to clients. “We saw a pullback during the press conference, reflecting that President Jean-Claude Trichet did not further step up his hawkish rhetoric.”

Economists expect the ECB to raise rates in the fourth quarter, before the Federal Reserve, which is forecast to raise rates in the first quarter of 2012, according to Bloomberg surveys.

The ECB last raised interest rates in July 2008, just as the global financial crisis was brewing, in a warning to unions and households not to seek recompense for faster inflation.

German chemical workers are seeking up to 7 percent more pay, and the country’s IG Metall union has asked for a 6 percent increase for workers at companies including Volkswagen AG.

Trichet repeated today that inflation risks “could move to the upside.” It’s only a matter of time before they do, said Jens Sondergaard, senior European economist at Nomura International Plc in London.

“The tone from the press conference today suggests to us that next month, the ECB will announce that the balance of risks surrounding the inflation outlook has shifted to the upside,” he said.