FRANKFURT (MNI) – European Central Bank Council members have sent
the clearest signals yet that the catastrophe in Japan and the military
action in Libya will not steer the bank off its tightening course.
The market fallout from both events has thus far remained limited,
and even if policymakers are cautious not to pre-commit, latest comments
suggest tensions would have to flare up significantly to change the
ECB’s mind and persuade it not to hike interest rates next month.
ECB President Jean-Claude Trichet said Monday that he has “nothing
to add to what the Governing Council at its last meeting considered.” At
the time, the Council considered it necessary to signal a rate hike for
April.
Other Council members were more explicit, reiterating the code
words “strong vigilance,” which the ECB uses to signal near-term
tightening.
“Strong vigilance is needed with a view to containing the upside
risks to price stability,” Yves Mersch said Monday. The Council “remains
ready to act in a firm and timely manner to prevent upside risks
weighing on medium-term price stability from materializing,” he
asserted.
Executive Board member Gertrude Tumpel-Gugerell also did nothing to
dissuade markets from believing that a rate increase is imminent, saying
that “strong vigilance” is warranted and that the situation is worth
monitoring “closely.”
Similarly, Bank of Italy Governor Mario Draghi said, “we have to
remain vigilant in safeguarding price stability.” He assured that the
ECB is “prepared to act in a firm and timely way.”
Executive Board member Juergen Stark, the bank’s chief economist,
said that despite “the heightened uncertainty” stemming from “events in
Japan” and “the geopolitical situation in other regions…there are good
reasons to normalise the monetary policy stance.”
The ECB still appears resolved to end twenty-three months of a
historically low official interest of 1%.
Stark argued that events in Japan should not change the Eurozone
outlook for further growth and higher inflation. In fact, he warned that
Japan’s potential need to substitute other sources of energy for nuclear
power “could trigger an increase in global commodity prices.”
ECB officials did not comment explicitly on the likely policy
impact of military action in Libya, but any potential shock from a more
prolonged military involvement or a spread of the violence will likely
weigh on both ends of the scale: The negative impact on economic
confidence may well be offset by rising oil prices that add to inflation
concerns.
There are still two weeks before the ECB’s next monetary policy
decision, and the bank’s plans could yet change should developments in
Japan or Libya result in more acute market tensions. “Information can
change and judgment can change,” Stark said. “Given the heightened
uncertainty I cannot make any commitment for the ECB or for the
Governing Council.”
Trichet cautiously and perhaps wisely did not reiterate the words
“strong vigilance,” thus appearing to leave the ECB some flexibility to
stay on hold in April. For now, however, everything points to a higher
rate as of April 7.
Meanwhile, European finance ministers have finalized plans for the
permanent European bailout fund, removing a key obstacle to the
successful completion of the “Grand Bargain” later this week. However,
there is still some disagreement over how to achieve greater lending
capacity for the current fund, the European Financial Stability
Facility. European leaders will haggle over that issue at their summit
starting Thursday.
The ECB continues to argue that the new fund is not flexible enough
— ie, that politicians won’t authorize it to buy government debt in
secondary markets. But financial markets were well prepared for that
outcome, and they seemed to welcome the agreement, at least initially.
Government bond spreads tightened across the board in early trading
Tuesday, with the exception of Greek bonds, which had been narrowing
aggressively anyway since mid-February.
However, later in the day the widening set in again as markets got
the jitters over political instability in Portugal, which could force
the government to collapse as soon as Wednesday if it loses a vote, as
is expected, on its budget-cutting plan. Such a development could
expedite a request from Lisbon for EFSF aid.
In addition, Irish spreads widened on rumors — later regarded to
be unfounded — that a coupon payment had been missed either by the
Irish government or a major Irish bank. A spokeswoman for Ireland’s debt
agency, the NTMA, told Market News International that there was no
coupon payment problem “on the sovereign side.”
Despite the disavowal, however, spreads remained elevated in late
afternoon trading. Greek spreads were also wider, but Spain was not
affected by today’s moves.
Easing tensions in recent weeks had allowed the ECB to refrain from
government bond purchases for the third week running. It was the third
time since the inception of the bond-buy program that the ECB had
refrained from market intervention for such a long period.
Even if the new tensions in sovereign debt markets forced the ECB
to resume its bond buying, that would not be likely to influence the
bank’s interest rate decision.
Trichet, asked Monday whether raising rates would exacerbate the
situation in vulnerable peripheral Eurozone countries, replied that the
ECB’s monetary policy is made for the euro area as a whole, not for
individual member states.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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