2ND ECB chief signals March rate hike By Andrew McCathie

dpa German Press Agency Published: Thursday February 8, 2007

By Andrew McCathie, Frankfurt- European Central Bank chief Jean-Claude Trichet flagged Thursday the ECB's plans to hike borrowing costs at its meeting next month, singling out the threat posed to inflation by big pay deals amid the 13-member eurozone economic pickup. Speaking at a press conference following a meeting ECB's 19-head rate-setting council, Trichet said that with regard to inflation risks "strong vigilance remains of the essence."

The use of the term "strong vigilance" is ECB code that a rate hike is in the pipeline, with Trichet going on to stress that monetary policy in the 13-member eurozone was "accommodative" and to warn of the threat of a pickup in inflation this year.

He was speaking after the ECB's decision to leave its benchmark refinancing rate on hold at 3.5 per cent, which was in line with analysts' forecasts. Trichet called the rate "low."

However, financial markets have already being gearing up for the ECB to hike the cost of money by 25 basis points at its meeting set down for March, when the bank will also release its latest so-called staff projections on inflation and economic growth.

Thursday's ECB meeting coincided with an announcement by the Bank of England to keep rates on hold at a five-year high of 5.25 per cent as the bank's monetary committee assess the impact of January's surprise increase in the cost of money.

Financial markets are, however, speculating that the British monetary authorities will lift rates again in April, raising the Bank of England's main lending rate to 5.5 per cent.

An increase next month in borrowing costs in the eurozone would lift the ECB's benchmark refinancing rate to 3.75 per cent, with Trichet pointing to a series of increased government charges across the eurozone, including Germany's hefty rise in value-added tax as helping to fuel a rise in inflation.

Trichet also warned of the risks posed another pickup in oil prices, robust credit growth and, in particular, big wage settlements in the eurozone.

IG Metall, the biggest industrial union in Germany, this week unveiled a 6.5 wage rise demand. IG Metall pay deals often set the stage for wage settlements across Germany, Europe's largest economy.

"The governing council will monitor the upcoming wage negotiations in the euro area countries very carefully," Trichet told his press conference.

A rate rise next month would also represent the ECB's seventh increase in borrowing costs since it launched its current rate- tightening cycle in December 2005.

But economists appear more divided as to the chances of further rises in the cost of money in the eurozone after the anticipated hike in March.

While some analysts believe official interest rates might have peaked in the currency bloc, others think the ECB will deliver one more rate boost in June before the notoriously cautious Frankfurt- based bank pauses to assess economic developments in the eurozone.

Despite a series of questions at his press conference, Trichet declined to be drawn on the bank's plans further down the track.

"We never pre-commit to any regular or irregular increase in rates," the ECB chief said. Economic circumstances are changing, he said. "We will do what we have to do."

A rise in June would take the ECB's main interest rate to 4.0 per cent. It would also mean that the ECB has delivered rate hikes totalling 200 basis points since December 2005.

During his comments to reporters, Trichet shot back at claims made during the build-up to this year's French presidential election that a strong euro has been undercutting economic activity and consequently jeopardizing jobs.

Waving off the concerns expressed in France, Trichet reeled off the results of an opinion poll showing widespread support for the ECB's independence across the eurozone.

Strongly restating the need for ECB independence, Trichet referred to the bank's charter of independence and its role in guarding against inflationary risks as set out in the Maastricht Treaty on European Union.

The ECB, said Trichet was "inflexible in respect of the treaty."

© 2006 dpa German Press Agency