Inflation is too high for the European Central Bank to consider cutting interest rates yet, its president Jean-Claude Trichet signalled yesterday.
The ECB has one only needle in its compass, and that is the needle which points to inflation, Mr Trichet said, after the Bank left interest rates unchanged at 4pc.
Borrowers are likely to have to wait until the summer, or even autumn, before they see the cost of their mortgages and other debts comes down, economists said. One believes there may be no cuts at all.
Analysts were surprised at the tough tone of Mr Trichet's comments. The euro hit new record highs against the dollar as it became clear the 1pc gap between interest rates on each side of the Atlantic is likely to widen. The US central bank, the Federal Reserve, has slashed interest rates to 3pc and is expected to cut them to 2.5pc later this month.
Mr Trichet made clear that the ECB does not intend following its American counterpart. It is clear that ECB officials are unhappy with the Fed's actions, which run counter to Washington assurances that it wants a strong dollar.
Analysts mostly agree that rates will be cut later this year, but disagree on when and by how much.
"We still expect rates to fall by three quarters of a percentage point by year end," said Austin Hughes, chief economist at IIB Bank. "We now expect the first rate cut in June but wouldn't rule out an earlier move if financial conditions deteriorate."
Simon Barry at Ulster Bank Capital Markets, takes the opposite view. "Our base case remains that the ECB will leave rates unchanged this year. Based on (yesterday's) events, it looks as if it would take indications of a sharp weakening in the economy to get the ECB to soften its stance on the inflation outlook."
In London, Gabriel Stein of Lombard Street Research expects cuts, but later rather than sooner.
"It is still the case that the ECB's next move is more than likely to be down. But unless matters change rapidly, this interest rate cut won't come for six months yet," he said.
"Given the ECB's inflation forecasts, it is understandable that the ECB is not in any mood at present to contemplate cuts," said Oliver Mangan at AIB Global Treasury."
Trend
"The indications are that growth will be well below trend this year, however rate cuts may amount to no more than half a percent," added Mr Mangan.
Economists at the ECB have increased their estimates for inflation this year and next, and reduced those for growth. Inflation in the euro area is at a record high of 3.2pc -- above Ireland's rate. But, at an average of 1.7pc, forecast growth in the eurozone this year would be only slightly below what is regarded as sustainable.
"Maintaining price stability in the medium term is our primary objective. The firm anchoring of medium to long-term inflation expectations is of the highest priority to the Governing Council," Mr Trichet said.
The Irish Independent, By Brendan Keenan, 07 March 2008
