MercoPress. South Atlantic News Agency

Euro zone rate rise next July, but will it be an only time?

The European Central Bank president Jean-Claude Trichet said that the ECB remains in “full alert” because of the continued inflation in the Euro zone and suggested that a rate hike, next July 3 “is possible”. However he emphasised that this would not signal the first step for a ladder of rate hikes.

"Risks to price stability have intensified in the last months", said Trichet during his quarterly presentation before the European Parliament in Brussels. He anticipated that inflation, according to the ECB studies, would continue for quite some time before beginning to moderate gradually along 2009. Trichet recalled that on June 5 he announced the ECB may raise its benchmark by a quarter-point to 4.25% in July to curb the fastest inflation in 16 years. While some of the ECB's 21 council members have left open the option of further moves, Trichet revealed others are against raising rates at all. We "didn't say that we could envisage a series" of rate increases, underlined Trichet. One move "should be enough", ECB Executive Board member Lorenzo Bini Smaghi said last week. Trichet insisted that the ECB "never pre-commits". The ECB primary mandate is to achieve price stability, which it defines as inflation just below 2%. Inflation in the 15-nation Euro area accelerated to 3.7% in May and according to ECB forecasts, will vary in the range of 3.2% to 3.6% in 2008 and between 1.8% and 3% in 2009. When the ECB last started tightening policy, Trichet also said it wasn't embarking on a series of increases. It raised rates eight times between December 2005 and June 2007, doubling the benchmark to 4%. Policy makers shelved a ninth increase in September to assess the economic fallout of the US housing slump, which sparked a global financial-market rout. ECB now forecasts expansion will slow to 1.8% this year and 1.5% in 2009. The Euro 16% gain against the US dollar in the last twelve months has eroded European export competitiveness. This has caused some division in the ECB executive board members: while the Spanish and French representatives are not convinced of a hike because of their country's economic situation, the German delegate is concerned with inflationary tendencies.