ECB set for rate hike to curb sluggish growth

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Eurozone economic growth outpaced the US and Japan in quarter II of 2006, but slower growth is predicted for the rest of the year. The ECB is set to react with another interest rate hike.

42 out of 43 economists polled by Dow Jones Newswires at the end of September 2006 think that the ECB is set for another 0.25 % rate hike at the next meeting of its Governing Council, at the beginning of October. This would be the fifth increase in the refinancing interest rate within ten months.

European Central Bank President Jean-Claude Trichet said, addressing Journalists in Frankfurt on 31 August 2006, that: "Strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained." Trichet used the "strong vigilance" term ahead of each of the four interest rate increases within the past year. He added: "With key ECB interest rates at still low levels in both nominal and real terms, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative. If our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation will remain warranted."

For most of the summer of 2006, the EU economy seemed to be set for a positive cycle. In April, the ECB business climate indicator for the 12-country Euro area surged above the value of 1 for the first time in five years, reaching an 11-year high of 1.42 in June. Most other economic indicators behaved likewise. 

In July and August , however, the curve flatted down slightly, leaving doubts as to whether a sustainably positive cycle is already in sight. The ECB said that the worsening of the assessment is mainly based on "a marked deterioration in industry managers' assessment of the production expectations for the months ahead". At the same time, it added, "assessments of the stocks of finished products, total order books, export order books and the production trend observed in recent months remained unchanged". 

More pessimistic growth expectations seem to prove the Commission's predictions of a 2.1% growth in 2006 right, even though the economy has grown by 2.4% during the year preceding quarter II, 2006. At the beginning of 2007, a planned 3% TVA raise in Germany is set to further slow down Eurozone growth.  

  • The ECB Governing Council will next meet on 5 October 2006, in Paris. Economists predict it will raise the refinancing rate by another 0.25%, bringing it up to 3.25%. 
  • The last 0.25% raise took place as recently as 3 August 2006. 

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