Trichet and Kohn give hints of further interest rate rises

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The Independent Online

The world's two largest central banks, the US Federal Reserve and the ECB, signalled yesterday that they still had their fingers on the interest rate trigger.

The European Central Bank raised its key lending rate to 3.25 per cent, the fifth increase since December last year and their highest level in almost four years.

In a strong hint of further rises, Jean-Claude Trichet, the bank's president, said monetary policy was still "accommodative" - encouraging growth - after yesterday's move. "If our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation," he said. "Continued strong monetary and credit growth in an environment of still ample liquidity... point to upside risks to price stability over the medium to longer term."

Martin van Vliet, an economist at ING Financial Markets, said the ECB was now set to move again in December. "His comments make it crystal clear that the ECB is intent on tightening monetary policy further," he said.

But Nick Stamenkovic, senior economist at RIA Capital Markets, said it was significant that Mr Trichet had avoided discussing the path for rates next year. "It certainly reflects a great deal of uncertainty at the ECB about the global picture," he said. "In my view, if rates go above 3.5 per cent they will risk monetary overkill."

Mr Trichet said the eurozone jobless rate had fallen, consumption should pick up further, and good global growth was supporting exports. Data for the third quarter of 2006 suggested that economic growth would remain robust, although a moderation was possible, he said.

The comments came a few hours after Donald Kohn, vice-chairman of the Federal Reserve, said the upside risks to inflation were "of greater concern" than the risks that growth would slow rapidly. "Important upside risks to the outlook for inflation warrant continued vigilance on the part of the central bank," he said. "If inflation failed to abate it could impose considerable costs on economic performance over time."