Friday

10th Apr 2020

ECB set to clash with eurozone ministers after rates increase

The European Central Bank (ECB) is heading for a collision with eurozone finance ministers, especially in Germany, after it gave its clearest signal yet that it intends to raise interest rates.

Politicians of the new German "grand coalition" government, set to be sworn in on Tuesday (22 November), reacted angrily over the weekend to a speech delivered by ECB chief Jean-Claude Trichet in Frankfurt on Friday.

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Mr Trichet clearly signalled that the ECB will up its main interest rate at the bank’s next regular meeting on 1 December. He said that the bank was ready to "moderately augment the present level of ECB rates," according to press reports.

Recent oil price rises, as well as money supply data, have raised the ECB's fear for inflation, sparking calls for the bankers to increase rates for the first time in more than two years.

Since June 2003, rates have stood at 2 percent, and the expected December rise is unlikely to exceed 0.25 points, experts predict.

But the move comes as an unwelcome present to the new German government led by chancellor Angela Merkel, which sees itself faced with sluggish growth.

Ludwig Stiegler, an SPD party financial expert, said the expected rate rise would "gravely hamper" efforts to revive growth, according to the FT.

One official said the move was "not a friendly act," just days before the new government would take office.

The expected rate rise is set to spark anger not only in Berlin, but also in other European capitals which are keen on keeping borrowing costs low to boost economic growth.

According to FT Deutschland, a spokesman for Jean-Claude Juncker, the Luxembourg prime minister who heads the eurogroup, said that finance ministers will tell Mr Trichet that they find the increase problematic.

On top of this, Mr Trichet is set to be grilled over the issue by members of the European Parliament today (21 November).

The ECB's move to put up interest rates for the first time since June 2003 sharply contrasts with the strategy of the American federal reserve bank, which has gradually upped the rate from 2.25 to 3.75 percent already since June last year.

But the more healthy state of the US economy has given the American "fed" more room for manoeuvre to increase money borrowing costs than the ECB, which is under constant pressure by European politicians to keep rates low.

However, with recent figures showing that eurozone growth is slowly picking up, further ECB rate increases are on the cards for 2006, experts told the FT.

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