Eurozone interest rates hit a seven-year high on Thursday but markets were relieved by a less hawkish tone from the European Central Bank, which damped fears of further rises to come.
he ECB comments prompted a fall in the value of the euro against the dollar and helped pare back slightly the earlier record high oil price of $145.85 a barrel. It also contributed to a modest recovery in European and US equity markets, which were also relieved by the publication of American jobs data less gloomy than had been feared.
The ECB’s fight against inflation, which led to the quarter-point rise in the main interest rate to 4.25 per cent, received powerful backing from Germany when Peer Steinbrück, the finance minister, told the Financial Times that he had “full respect” for its decision.
“I am convinced that there is a high probability that we can overcome the financial turmoil during the next year or year-and-a-half. But I think worldwide inflation will affect us for a longer time,” Mr Steinbrück said.
Data this week showed soaring oil prices had pushed eurozone inflation to 4 per cent – the highest since the launch of the euro in 1999 and more than double the ECB target of an annual rate “below but close” to 2 per cent.
As oil prices surged to a record, Mr Trichet took the unusual step of urging an easing of supply constraints. “There are a number of industrialised countries preventing drilling … that are preventing exploration of new fields,” he said without mentioning specific countries.
But financial markets scaled back expectations that Thursday’s move would be followed by more interest rate increases after Mr Trichet said the ECB had “no bias” about future moves.
Together with his assertion that interest rates at 4.25 per cent would “contribute to achieving our objective”, his comments suggested the latest increase was meant largely as a sign of ECB determination to bring inflation back under control and might not be followed by further rises. That led to the euro weakening against the dollar, although Mr Trichet left open the possibility of further hikes.
By last night, markets saw only a 25 per cent chance of a quarter percentage point rise in September and were no longer pricing in rises above that.
Mr Trichet shocked markets last month when he revealed the ECB was mulling an interest rate increase – a move that highlighted how concerns had switched from fears about the impact on growth of the financial market crisis to worries about global inflation.
He admitted then that the ECB’s 21-strong governing council had been divided. But Mr Trichet said the decision was “unanimous”.
Mr Trichet dismissed the idea that the world faced an era of “stagflation” – slow growth and high inflation – saying growth remained evident.
