European Central Bank Unexpectedly Raises Key Interest Rates

A WSJ.com News Roundup

FRANKFURT -- The European Central Bank on Thursday raised its key short-term interest rates by a quarter percentage point, in an unexpected move that the ECB attributed to concerns that higher oil prices and a weak euro would lead to lasting consumer inflation.

The ECB's benchmark minimum bid rate was raised to 4.75% from 4.50%. The rate is applied at its weekly main refinancing operations -- the central bank's most important open market facility. The ECB's marginal lending rate and deposit rate now stand at 5.75% and 3.75%, respectively, up from 5.50% and 3.50% previously.

Most economists had expected the central bankers to refrain from raising rates Thursday, even though the ever-present threat of inflation was increasing the likelihood the ECB would boost its main interest rate soon.

Speaking after the announcement, ECB President Wim Duisenberg said the rate hike was justified by all available data and forecasts and was supported by a solid consensus from the governing council. With the specter of inflation casting a shadow over the euro zone, Mr. Duisenberg predicted that September's consumer price index would likely top 2.3%, noting 'it will be some time before inflation falls below 2%,' the ECB's medium-term target for price stability.

Mr. Duisenberg said previous rate hikes are still working their way through to slow the economy and that euro-zone growth has reached 'cruising altitude' after an acceleration.

He signaled that the next rate hike could be a long way off when asked if Thursday's move was sufficient for now. 'For me, it clears the horizon,' he said. 'I can't say anything about future developments. That we will judge when the time is ripe, and that time may be a long way off.'

In the first press conference since the ECB led a joint intervention in currency markets last month to support the euro, Mr. Duisenberg said he was 'very satisfied' with the action. The move was the ECB's, he said, indicating the council didn't cede ground or cave in to political pressure from member governments of the euro zone.

Regarding the amount of intervention, 'all estimates reported in the media ranging from 1.5 billion to 20 billion are correct.' Mr. Duisenberg didn't specify whether that was dollars or euros, nor did he narrow the range at all.

The interest rate hike comes only five weeks after the ECB raised interest rates by a quarter percentage point. Thursday's move was the sixth rate hike this year by the euro-zone's central bank.

After the rate hike, the euro rose to 87.68 U.S. cents just after the ECB move was announced, from about 87.00 cents before the news, but it fell back to 87.09 cents late Thursday in Europe.

Meanwhile, the Bank of England held the securities repurchase rate at 6% Thursday following its two-day Monetary Policy Committee meeting. This is the eighth consecutive month that the repo rate has been left unchanged by the MPC. The result was expected.

The ECB rate increase came on the same day that the European Commission published its euro-zone sentiment survey results for September, which showed a sharp drop in consumer confidence, led by Ireland, Spain, Belgium, France, Germany and Italy. But industrial confidence remained steady, as order books recovered from a fall in August, the commission said.

The news was better in Germany, where the employment situation is improving steadily, despite signs of flagging domestic business confidence. The jobless rate in the euro-zones biggest economy fell to an unadjusted 9.0% in September from 9.3% in August, Germany's labor office said Thursday. Economists had expected the jobless rate to remain steady.

The number of unemployed people in Germany fell by a seasonally adjusted 18,000 in September, compared with a revised fall of 21,000 in the previous month. The latest decline was more than expectations for a fall of 14,500.

Labor Office President Bernhard Jagoda attributed the improvement in the unemployment situation to 'the end of the vacation period, continuing strong economic upturn, and the implementation of employment policies and demographic developments.'

But the employment market is only improving in Germany's western states, while eastern states are still suffering. In eastern Germany, the number of seasonally adjusted unemployed rose by 1,000. The total unadjusted number of jobless fell to 3.68 million from 3.78 million in August.

Last month, Mr. Jagoda said September is a 'key month' for a clear future prognosis of the data, and that he expected a 'slightly better result.'

The jobless figures are in contrast with the continued deterioration in the Ifo business climate index. The latest index of West German confidence, released in September, fell to 99.0 for August from 99.1 in July.

Copyright (c) 2000 Dow Jones & Company, Inc.

http://dowjones.work.com/index.asp?layout=story_news_main&doc_id=11331

-- Martin Thompson (mthom1927@aol.com), October 05, 2000

Answers

Rate rises in Europe weaken euro Duisenberg denies deliberate intervention

Special report: economic and monetary union Money Unlimited

Mark Atkinson, economics correspondent Guardian

Friday October 6, 2000

An attempt by the European Central Bank to shore up the euro appeared to backfire yesterday when the currency weakened in response to a surprise increase in continental interest rates.

After initially rising against the dollar, the euro quickly retreated to below $0.87(60p). This was the first time it had dropped since the G7 intervened to support it on September 22.

ECB president Wim Duisenberg denied that the quarter point increase in the cost of borrowing to 4.75% was designed to reinforce the impact of intervention. He said that it was aimed at stemming price pressures from the recent surge in oil prices and the weak euro.

"The interest rate decision of today was exclusively based on our analysis in the context of our monetary policy strategy," said Mr Duisenberg.

However, analysts said the timing of the move had the hallmarks of a concerted effort to strengthen the ailing currency.

They felt that the intervention was deliberate. "The reason why they're hiking rates now and not later this month or next month is that they want to make clear that this intervention is serious," said Sonja Hellemann, foreign exchange strategist at Dresdner Kleinwort Benson in London.

"I think they're going to intervene again very soon," she added.

The rate rise sparked a modest sell off in continental European stock and bond markets amid fears that it could result in a further dampening of growth.

In the UK, however, markets reacted calmly to the news that the Bank of England had left rates on hold at 6% for the eighth month in a row.

While many economists believe the monetary policy committee may be tempted to raise them again, a growing number say deflationary forces in the economy are so strong, rates have already peaked.

"Warning signals are flashing from the corporate sector," said Darren Winder, economist at UBS Warburg.

"I think the (US) Federal Reserve has realised that but I am not sure if all the MPC members have taken that on board yet," he said.

"I cannot imagine why rates could go up next month. People need to wake up and look at what is going on. There is a string of profit warnings from companies at the moment. That is telling us something about the economy, that rates need to come down," Mr Winder added.

Rate rises in Europe weaken euro Duisenberg denies deliberate intervention

Special report: economic and monetary union Money Unlimited

Mark Atkinson, economics correspondent Guardian

Friday October 6, 2000

An attempt by the European Central Bank to shore up the euro appeared to backfire yesterday when the currency weakened in response to a surprise increase in continental interest rates.

After initially rising against the dollar, the euro quickly retreated to below $0.87(60p). This was the first time it had dropped since the G7 intervened to support it on September 22.

ECB president Wim Duisenberg denied that the quarter point increase in the cost of borrowing to 4.75% was designed to reinforce the impact of intervention. He said that it was aimed at stemming price pressures from the recent surge in oil prices and the weak euro.

"The interest rate decision of today was exclusively based on our analysis in the context of our monetary policy strategy," said Mr Duisenberg.

However, analysts said the timing of the move had the hallmarks of a concerted effort to strengthen the ailing currency.

They felt that the intervention was deliberate. "The reason why they're hiking rates now and not later this month or next month is that they want to make clear that this intervention is serious," said Sonja Hellemann, foreign exchange strategist at Dresdner Kleinwort Benson in London.

"I think they're going to intervene again very soon," she added.

The rate rise sparked a modest sell off in continental European stock and bond markets amid fears that it could result in a further dampening of growth.

In the UK, however, markets reacted calmly to the news that the Bank of England had left rates on hold at 6% for the eighth month in a row.

While many economists believe the monetary policy committee may be tempted to raise them again, a growing number say deflationary forces in the economy are so strong, rates have already peaked.

"Warning signals are flashing from the corporate sector," said Darren Winder, economist at UBS Warburg.

"I think the (US) Federal Reserve has realised that but I am not sure if all the MPC members have taken that on board yet," he said.

"I cannot imagine why rates could go up next month. People need to wake up and look at what is going on. There is a string of profit warnings from companies at the moment. That is telling us something about the economy, that rates need to come down," Mr Winder added.

http://www.guardianunlimited.co.uk/Archive/Article/0,4273,4072714,00.h tml

-- Martin Thompson (mthom1927@aol.com), October 05, 2000.