European Central Bank officials edged back from a threat to raise interest rates, saying markets have over-reacted to their change in tone on inflation.
“The Governing Council of the ECB sees present interest rates as adequate,” council member Ewald Nowotny said at an event in Budapest yesterday. “We do not see a need for an interest rate change in the foreseeable future.” Bundesbank President Axel Weber also said he expects inflation to remain below the ECB’s 2 percent limit in the medium term, softening his language on the risks to price stability.
“It looks like the ECB is now trying to fine-tune market expectations,” said Laurent Bilke, global head of inflation strategy at Nomura International in London, who used to work as a forecaster at the ECB. “The market didn’t get the ECB completely right, but at the same time policy makers will not be successful in telling the market that there hasn’t been a shift in the policy stance.”
The euro has risen four cents against the dollar since ECB President Jean-Claude Trichet last week warned that the central bank will act if needed to contain inflation risks, which he said “could move to the upside.” Nowotny joins Athanasios Orphanides of Cyprus in suggesting markets may have over-reacted to the comments.
“I think the statements of President Trichet at the last press conference have been perhaps interpreted in a rather one- sided way,” Nowotny said. Orphanides said in an interview published on Jan payday loan lenders. 17 that the ECB’s policy statement was not “overly hawkish” and there is sometimes an “overreaction to the underlying message.”
The euro fell a third of a cent to $1.3360 after Nowotny spoke last night.
A stronger currency could undermine European exports just as the region grapples with a sovereign debt crisis that’s forced government to cut spending, damping the outlook for economic growth.
Weber said in a speech in Frankfurt yesterday that while inflation risks “could increase,” they are still “more or less balanced” and prices should remain contained in the medium term. Last week, he said risks to the medium-term inflation outlook “could well move to the upside.”
Inflation accelerated to 2.2 percent last month, breaching the ECB’s 2 percent limit for the first time in more than two years. Trichet said on Jan. 13 it may quicken further before moderating toward the end of the year. The ECB has “never pre- committed not to move interest rates,” he added.
The ECB has held its benchmark interest rate at a record low of 1 percent since May 2009.
The euro surged after Trichet’s comments and Citigroup Inc. immediately revised its forecast for the ECB’s first rate increase to the second half of this year from the first quarter of 2012.