ECB looks to a rate increase – but in May – amid optimism over economy | VailDaily.com
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ECB looks to a rate increase – but in May – amid optimism over economy

FRANKFURT, Germany – Consumers appear more confident and growth is on the upswing in most of the countries that use the euro as the European Central Bank considers its next interest rate move at its meeting on Thursday.Analysts expect the bank will lay the foundation for a May rate hike at Thursday’s meeting.The bank raised its key refinancing rate to 2.5 percent at its last monthly meeting March 2, after a similar quarter-point increase in December.”We expect the ECB Council to leave interest rates unchanged” this week, said Michael Schubert, an economist with Commerzbank in Frankfurt. “Since the Governing Council’s monetary policy is medium-term oriented, there is simply not enough new information available for the bank to reassess the longer-term situation, after it hiked rates at its meeting in early March.””The bank has never changed rates at two consecutive meetings,” he wrote in a research note.The bank is looking further down the road to the possibility of inflation, which can be a side effect of a stronger economy. There are plenty of signs of a moderate economic uptick after a mediocre 2005.In Germany, Europe’s biggest economy, the Ifo index of business confidence has roared to a 15-year high while, in Italy, confidence broke a five-year record.In February and March, retail sales in much of Europe rose. Big business is spending money on acquisitions, including Alcatel SA’s move for Lucent Technologies Inc. and drug maker Bayer AG’s bid for Schering AG.Growth in the 12 countries using the euro was 2.1 percent in 2004, but narrowed to 1.3 percent last year. The European Union foresees expansion of 1.9 percent in 2006.ECB President Jean-Claude Trichet has vowed to remain tough on inflation, though forecasts so far are encouraging. That raises doubt about how long the bank will need to continue raising rates after May.”We’re doing what’s necessary to be credible,” Trichet said last month.”Euro-zone inflation is gradually softening,” wrote Lorenzo Codogno, co-head of European economics at the Bank of America in London. He noted that the most recent flash estimate was 2.2 percent, a whisker above the bank’s guideline of less than but close to 2 percent annual inflation.Core inflation – excluding volatile energy and food prices – was only 1.2 percent in February, he added.”Despite oil price tensions and strengthening domestic demand, the inflation performance remains subdued,” Codogno said. “Barring another oil spike, the headline rate is likely to ease further during the course of the year.”Most economists and analysts think the bank’s Governing Council will act in May. The June meeting is slated for Madrid, Spain, one of two a year held away from the ECB’s Frankfurt headquarters to underline its status as a pan-European institution.Marco Kramer, an economist with HVB Group in Munich, said the ECB would not wait to raise rates until then.”The ECB has so far never hiked rates when their meeting was abroad,” Kramer said. “It also makes a lot of sense to explain rate hikes in a ‘normal’ press conference in Frankfurt and, given the tailwind from the economic data news flow, the next monetary tightening step should already come in May.”—On the Net:http://www.ecb.intVail, Colorado


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