Trichet's rate hint triggers euro sell-off

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The Independent Online

A rise in eurozone interest rates next month might not be followed by a series of increases, the head of the European Central Bank said yesterday.

The remark by Jean-Claude Trichet appeared to undermine the hawkish tone he took last week and triggered a swift sell-off in the euro. "It would not be a good working assumption to consider that we are at the start of a series of interest rate increases," M. Trichet told a European Parliament committee.

The euro fell as low as $1.1749 against the dollar from as high as $1.1838 before the hearing. Nick Stamenkovic, senior economist at RIA Capital Markets, said: "I think they are going to follow a gradual tightening path.My own view is that the economic picture is still quite weak, and interest rates in the eurozone will peak at 2.5 per cent."

M. Trichet took the markets by surprise on Friday when he said that the bank would "moderately augment" the interest rate.

A rate increase would be the first since October 2000 and bring eurozone borrowing costs closer to the 4 per cent in the US and the 4.5 per cent in the UK.

The shrinkage in the interest rate differential has undermined the pound in recent weeks, especially in the wake of the 12 rate rises by the US Federal Reserve. If the US raises rates as expected in December and January it would bring it in line with the UK base rate for the first time since 2000.

However, yesterday's comments by M. Trichet put a floor under sterling's fall. The pound was also boosted by figures showed a mild re-acceleration in house price inflation.

The Office for the Deputy Prime Minister said house price inflation picked up to an annual 3.3 per cent in September from 2.8 per cent the month before. The ODPM data provided further evidence that the housing market was stabilising after a slowdown in the last year. Economists warned there was unlikely to be a sharp pick-up in prices in the months ahead as rates were likely to stay on hold at 4.5 per cent and earnings growth remains subdued.

Mervyn King, Governor of the Bank of England, said over the weekend that not all businesses are demanding interest rate cuts and the economy had not slowed as much as some reports had suggested. "I don't accept that business is clamouring for cuts. Some business organisations have said they want them to stay at the current level," he told the Derby Evening Telegraph.