Eurozone interest rates could rise in April, ECB says

ECB HQ The European Central Bank has kept interest rates in the eurozone unchanged at a record low 1%

The president of the European Central Bank has said that a rise in eurozone interest rates was "possible" at its next policy meeting in April.

Jean-Claude Trichet said the ECB was "in a posture of strong vigilance" against rising inflation.

He said the rate-setting committee may have to act in the light of recent "price shocks" due to the sharp rises in commodity prices.

On Thursday the ECB decided to keep rates at 1% at this month's meeting.

Speaking at a press conference, Mr Trichet stressed that no decisions had yet been made.

"We are never precommitted. The decision will be taken at the next meeting by the governing council," he said.

But analysts said it was a clear signal that a rate rise next month was likely.

Analysis

Inflation is a growing global concern as food and energy prices rise. In Brazil, the central bank raised interest rates on Wednesday for the second time in three months.

There is growing support for an increase by the Bank of England too, although so far the majority on the main policymaking committee have opted to keep interest rates at their all time low.

The dilemma for central banks in the rich countries is that higher interest rates could discourage consumer spending and business investment and undermine the weak recovery from recession.

Developing economies face a different problem. Raising interest rates can draw in foreign investment funds. That is normally welcome, but now there are concerns that the result might be financial market bubbles and currencies rising so far that local industries are made uncompetitive.

Jacques Cailloux, of RBS European Economics, said that the ECB appeared to have "pre-announced a rate hike for its next policy meeting.

"This is a shock to us relative to our earlier expectation of ECB [rates] remaining on hold till September," he said.

Mr Trichet said that the ECB may need to act to prevent "secondary effects" from the current inflation shock sweeping the 17-nation eurozone.

Second-round effects are wage and price rises, which could be discouraged by raising interest rates.

Higher energy, food, and raw material costs have helped push up inflation throughout the world, and analysts are speculating that the UK will raise rates sooner rather than later.

'Prepared to act'

Inflation in the eurozone rose to 2.4% in January, above the ECB's target of just below 2%.

The bank has said it expects inflation to stay slightly above 2% for most of 2011, before moderating again in 2012.

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Mr Trichet said that the risk to prices were "on the upside" and that the whole governing council was "prepared to act in a firm and timely manner".

He added: "The continued firm anchoring of inflation expectations is of the essence."

The strength of Mr Trichet's warning on inflation surprised the markets. The euro shot up around a cent to around $1.3950 while bond prices across the single currency zone fell.

Analysts said that the markets were betting on an April rise in interest rates.

Kornelius Purps, fixed income strategist at Unicredit, added: "We should now try to price in a steady rate hike cycle starting as soon as next month."

The ECB decision to keep rates on hold for March is the 22nd-consecutive month they have been kept at record low of 1%.

The bank also kept two other rates, the marginal lending rate and the deposit rate, unchanged at 1.75% and 0.25%.

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