FRANKFURT, (AFP) - The European Central Bank is set to unveil its second rate rise since April on Thursday, but might then pause to assess the eurozone’s economic prospects as Greece grapples with its debt crisis.
ECB president Jean-Claude Trichet repeated last week that the ECB governing council was “in a state of strong vigilance” regarding inflation, a code phrase for a rate hike announcement.
“A 25bp (basis points) hike to 1.5 percent therefore looks like a done deal,” said Capital Economics senior European economist Jennifer McKeown, a view shared by essentially all others.
The ECB wants to bring eurozone inflation that now stands at 2.7 percent back towards its target of just below 2.0 percent.
It will also consider the broader macro-economic picture, which includes unemployment that remained at 9.9 percent for the third month in a row in May amid signs the 17-nation economy was cooling down.
The latest purchasing managers index published by the research group Market showed in addition a widening gap between core eurozone members and several on its periphery.
In London meanwhile, the Bank of England is expected to keep its main rate at a record low level of 0.50 percent on Thursday.
Market interest is focused on whether Trichet will signal an additional rate rise later this year or whether his tone will suggest the bank is settling into wait-and-see mode as European Union leaders deal with Greece’s problems.
Trichet “will probably give little away on what happens thereafter,” Commerzbank economist Michael Schubert forecast.
Public finances, labour costs and rolling over debt
Eurozone finance ministers held a telephone meeting on Saturday to approve the EU’s share of fund payments with the International Monetary Fund worth a total of 12 billion euros ($17.4 billion) needed to avoid a Greek debt default.
The move came after Greek lawmakers passed new austerity measures ordered by creditors to pave the way for continued emergency funding from Europe and the IMF.
ECB president Trichet told EU lawmakers that Greece and other debt-laden countries were now obliged to correct past practices “that were not reasonable, and should have been prevented.”He highlighted soaring wages afforded to public workers in several countries now threatened by debt crises, and said: “What we are observing now is a correction.”Another key issue for markets and economists is whether the ECB will back mooted plans for private investors to join Greek rescue efforts by voluntarily renewing bonds issued by Athens when they come due.
Accepting to plough some of the maturing bonds back into new ones with terms of up to 30 years would give Greece some breathing space, without addressing the fundamental problem of the country’s inefficient economy.
International ratings agencies might still determine that such rollovers constitute a de-facto default, and Trichet reiterated last week that the ECB would not take part.
The central bank is the single biggest holder of Greek public debt, having bought around 47 billion euros worth of sovereign bonds on secondary markets, according to Deutsche Bank Global Markets Research. Trichet told EU lawmakers that the ECB was following the question “very very closely.”But he added that “this issue of discussing voluntary private sector involvement between the governments and the private sector institutions is really the responsibility of the governments.”