EUROPE'S central bank upstaged its UK counterpart yesterday, shocking financial markets with a warning that it may raise interest rates next month.
On the day the Bank of England announced its widely expected decision to hold interest rates at 5 per cent, the prediction of rises to come in the eurozone took analysts by surprise.
In an unusual move, ECB president Jean-Claude Trichet hinted hea
vily that concerns over inflation would mean that the next move in Europe would be up.
Trichet revealed that the ECB's governing council had agreed to leave rates on hold at 4 per cent this month but was determined to continue to tackle inflation.
Some members of the ECB's 21-member policymaking council had wanted to raise rates now, some saw a case for a rate rise later and some saw no case at all, Trichet told the ECB's monthly news conference in Frankfurt.
He added: "It is not excluded that, after having carefully examined the situation, we could decide to move our rates a small amount in our next meeting in order to secure the solid anchoring of inflation expectations.
"I don't say it's certain. I say it's possible."
The ECB is usually circumspect about its policy intentions, favouring codes and consensus over a frank discussion of policy disagreements. Economists were stunned by Trichet's remarks.
"It's a bolt out of the blue," Barclays Capital's chief European economist Julian Callow said.
The decision by the Bank of England's monetary policy committee( MPC) to peg rates at 5 per cent was no surprise but indicated that the Bank shares the ECB's concern over the prospect of further rises in inflation.
Analysts said last night that the MPC had little scope to reduce rates after the Consumer Prices Index hit 3 per cent. Economists also warned that there was no guarantee that interest rates will be cut at all this year in the UK.
The Bank's vote against a cut came despite gathering gloom over the UK housing market and wider economy.
House-price figures from the country's biggest mortgage lender, Halifax, revealed yesterday that values fell by a further 2.4 per cent in May, making the annual drop nearly 4 per cent – the fastest rate of decline since 1993.
The decision to hold the rate at 5 per cent represented a blow to homeowners in need of relief from rising petrol, mortgage, food and energy bills.
CBI chief economic adviser Ian McCafferty said: "The Bank had little option this month other than to leave interest rates on hold – oil and commodity prices are still of great concern and businesses are having to raise prices as profit margins get squeezed further."
A cut to 4.75 per cent was on the cards only weeks ago, with data suggesting the economic slowdown was gathering pace.
But inflation hit 3 per cent in April and is likely to remain above that level until well into next year – the Bank warning it
could hit 3.7 per cent this year.
The full article contains 510 words and appears in The Scotsman newspaper.
