Trichet Says ECB Ready to Raise Interest Rates to Stem European Inflation

(Bloomberg) -- European Central Bank President Jean- Claude Trichet said the bank is poised to raise interest rates for the first time in five years to stem inflation in the 12 euro nations. Bonds fell across the region.
The bank's governing council is ready ``to moderately augment the present level of interest rates in order to take into account the level of risks to price stability,'' Trichet said in a speech to a banking conference in Frankfurt today. ``We will withdraw some of the accommodation which is in the present monetary policy stance.''
Trichet's comments are the clearest sign yet the ECB will increase its benchmark interest rate from a six-decade low of 2 percent at its next policy meeting on Dec. 1. Inflation, at 2.5 percent in October, has been above the ECB's 2 percent target for nine months and economic growth picked up in the third quarter.
``He's pre-announced a rate hike,'' said Holger Schmieding, co- head of European Economics at Bank of America in London ``The choice of words points to a 25 basis point rise rather than 50.''
The euro jumped to $1.1750 from $1.1670 after Trichet's comments. The yield on the benchmark German two-year bond soared 11 basis points, or 0.11 percentage point, to 2.80 percent at 2:34 p.m. in London. The increase was the biggest since Sept. 3 last year. Bond yields move inversely to prices.
All 19 economists surveyed by Bloomberg after Trichet's remarks expect the bank to raise the benchmark refinancing rate by at least a quarter point on Dec. 1. In an Oct. 28 survey, only one out of 26 economists predicted an increase.
`Big Mistake'
European politicians and executives want the ECB to wait for more signs economic growth is accelerating before raising rates.
``It's too soon to have an increase in interest rates in Europe,'' Italian Deputy Finance Minister Mario Baldassarri said in an interview in Frankfurt. German Finance Minister-designate Peer Steinbrueck said in an interview Nov. 16 the ECB should keep rates on hold ``for as long as possible.'' His Austrian counterpart Karl- Heinz Grasser said Nov. 8 the bank should keep a ``steady hand'' to support growth.
``It's a big mistake to raise interest rates now,'' said Henri Lachmann, chief executive of Schneider Electric SA, the world's biggest maker of circuit breakers. ``The enemy isn't inflation, but growth and unemployment.'' The euro region jobless rate was 8.4 percent in September.
Trichet said today interest rates will ``remain accommodative'' even after an increase. It is important ``to continue solidly anchoring inflation expectations'' and preserving confidence in monetary stability will ``contribute to sustained growth and job creation in the euro area,'' he said.
`Unsettled'
Commerzbank AG Chief Executive Klaus-Peter Mueller said the fear of higher rates is overblown. ``Whether rates are lowered or raised by a quarter of a percentage point won't stop anyone making a sensible investment,'' he said in an interview. ``I see the expected rise as a signal the central bank is ready to fight inflation.''
Inflation will average 2.3 percent this year, up from 1.9 percent forecast in April, the European Commission, the executive arm of the 25-nation European Union, said yesterday. It raised the 2006 forecast to 2.2 percent from 1.5 percent, the sixth year the ECB would fail to keep inflation below its 2 percent limit.
``Of course that unsettles us as a central bank,'' ECB council member Axel Weber said in an interview today in Frankfurt, when asked about upward revision in the commission's inflation forecasts. He also said he expects growth in the economy of the dozen euro nations to accelerate next year.
Second Increase?
``The debate focuses on what will happen in 2006, whether next year's growth will accelerate in Europe,'' said Lionel Oster, who helps manage more than $120 billion as head of European government bonds at F&C Management Ltd. in London. ``That's the bet the ECB is making.''
Euro region growth will reach 1.3 percent this year, picking up to 1.9 percent in 2006 and 2.1 percent in 2007, the commission said yesterday. The forecast was cut from 1.6 percent for 2005 and 2.1 percent for 2006 due to sluggish growth in the first half of this year.
Euro-region growth accelerated to 0.6 percent in the third quarter from 0.3 percent in the three months through June, Luxembourg-based Eurostat said Nov. 15. Germany's economy, Europe's largest, also expanded 0.6 percent from the second quarter.
The commission predicted U.S. growth of 3.2 percent next year, which would mean Europe is set to lag behind the world's largest economy for the 14th time in 15 years in 2006.
``The next question is when the next hike will come,'' Bank of America's Schmieding said. ``We think it will probably be in March. More than 20 basis points is already priced in.''
Yields on European interest-rate futures jumped as much as 11 basis points after Trichet's comments, indicating traders increased bets the ECB will raise rates as high as 2.75 percent by the end of 2006.
The September Euribor futures contract, which settles to a three-month interest rate that has averaged about 14 basis points more than the ECB's key rate since the currency's introduction in 1999, yielded 2.965 percent.

To contact the reporter on this story:
Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net.