Bloomberg News

Trichet Signals ECB Ready to Raise Rates Amid Greek Crisis

June 28, 2011

(Updates markets in third paragraph.)

June 28 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said policy makers are in “strong vigilance mode,” signaling they intend to raise interest rates next week even as Greece struggles to avert a default.

“We’re taking the decision progressively to anchor inflation expectations,” Trichet said at a press conference in Amsterdam today following a seminar with central bankers from the Asia-Pacific region. “As far as we’re concerned, we’re in strong vigilance mode,” he said, repeating a phrase the ECB uses to indicate a rate increase is imminent.

The euro rose more than a cent after the comment to $1.4351 at 1:50 p.m. in New York. Yields on German two-year notes closed 8 basis points higher at 1.46 percent.

The ECB raised its benchmark rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent. Inflation in the 17-nation euro region has been in breach of the central bank’s 2 percent limit since December. At the same time, the threat of a Greek default is roiling European markets and clouding the economic outlook. ECB officials next convene in Frankfurt on July 7.

Trichet’s comment is “a very strong signal, but it’s always conditional on what happens in Greece,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “If things go their way, then they’re set for a rate hike, but Thursday next week is a long way off. Greece could blow up in the meantime.”

Up to Governments

Trichet declined to comment specifically on the Greek crisis or a French proposal under which creditors would agree to roll over 70 percent of their Greek bonds.

“This is the responsibility of governments,” he said. “There are several proposals being examined. We’re observing what’s going on. The decision is made by the governments themselves and then we have our own position.”

Greek police fired tear gas to disperse protesters in the center of Athens today as labor unions shut down government services before lawmakers vote on austerity measures that are a condition of further aid for the debt-riddled nation.

“This adjustment program is very, very important,” Trichet said. “We consider it of the utmost importance that the Greek democracy would take the appropriate decisions. It is its own responsibility to redress or adjust the economy of the country, which is decisive in a medium or long-term perspective for growth and job creation.”

Bank of Korea

Also at the press conference were Bank of Korea Governor Kim Choong Soo and Dutch Central Bank Governor Nout Wellink. Kim was asked if Korea would consider buying Greek debt.

“I can’t say which things we will buy, I’m not in a position to give an answer,” he said. Asked if he is concerned about Greece, Kim said: “Our assumption is that these problems will be solved in a reasonably appropriate way. We didn’t assume it will cause further problems to the world economy.”

Trichet said anchoring inflation expectations is “extremely important for the stability, the confidence, and the prosperity of Europe.” While central bankers might have “very different challenges to cope with, we are very united on the goal of solidly anchoring inflation expectations,” he said. “That doesn’t mean we have an easy task.”

--With assistance from Christian Vits in Frankfurt. Editor: Matthew Brockett

To contact the reporters on this story: Jeffrey Black in Frankfurt at jblack25@bloomberg.net; Jurjen van de Pol in Amsterdam at jvandepol@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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