Trichet to deliver key speech on rates

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The president of the European Central Bank, Jean-Claude Trichet, will deliver a keynote speech today on the Bank's interest rate policy. Before the recent credit crunch, the ECB had clearly signalled that it was prepared to raise interest rates at its next scheduled meeting, on 6 September.

However, it has since lent huge amounts to banks and other financial institutions which have found themselves unable to borrow through the usual channels, as a result of the nervousness stalking financial markets. Such an injection of liquidity, viewed by some as a de facto rate cut, has raised questions about whether the ECB will continue to place primacy on its domestic agenda, or on restraining inflation in the 13-nation eurozone, or whether it will suborn that objective in favour of promoting orderly financial markets.

Last week, the ECB announced an additional, longer-term (three-month) commitment to aiding the banking system with €40bn earmarked for credit lines. In an accompanying statement, the ECB said: "The position of the Governing Council of the ECB on its monetary policy stance was expressed by its President on 2 August 2007" - when M. Trichet stated that "strong vigilance" against inflation was still needed.

Many economists interpreted this as a signal that the ECB still intended to raise interest rates next week. But ECB officials have suggested that such an interpretation may be wrong, and point also to M. Trichet's quotes at that time that there was no "pre-commitment" to raise rates.

"The ECB wanted to signal a clear distinction between money market operations and its monetary policy outlook. They wanted to signal that the tender operation should give no hint on the interest rate decision," an official is quoted as saying. "You can't exclude that the Bank will really increase rates, but they will wait with their decision as long as possible. There are other important data like [Germany's] Ifo [business optimism] index. Why shouldn't they wait in this volatile situation? With this sentence the ECB reserved the right to raise rates, but it was not meant to state: 'We're going to do it.'"

Thus M. Trichet may do little more today than create some room for manoeuvre and keep his options open. "The ECB is far from decided," said Michael Hume, chief European economist at Lehman Brothers. M. Trichet's speech "seems too soon to clarify matters."