FRANKFURT, Nov. 20 (Reuters) — The European Central Bank is ready to raise interest rates moderately, ECB President JeanClaude Trichet said on Friday, sending a clear signal it will tighten rates in December for the first time in five years.
The euro currency and yields on European government debt leapt upward on prospects of a quarter-percentage point rate hike to 2.25 percent at the ECB’s next policy meeting on Dec.1.
The move would mark a bold ECB stand against political pressure not to hike rates in the midst of a fragile economic recovery. Trichet said the rate increase would still leave interest rates at a low level to support economic growth while keeping inflationary expectations in check.
"The Governing Council is ready to take a decision to move interest rates and to moderately augment the present level of intervention rates in order to take into account the level of risks to price stability that have been identified," Trichet said at a Frankfurt European Banking Congress.
"We will withdraw some of the accommodation, which is in the present monetary stance, while this policy would remain accommodative. This move would aim at coping with the inflationary risk," he said.
The surprise announcement, tacked onto a speech about global imbalances, ended weeks of intense speculation in financial markets over the timing of an ECB rate hike and showed Trichet in command of a restive 18-member Governing Council.
"I almost fell off my chair," said Joachim Fels, senior European market economist at Morgan Stanley. "The purpose was to calm down the mushrooming speculation on whether the Governing Council was divided."
In comments to a business group in Philadelphia later on Friday, ECB Vice President Lucas Papademos said the risks to price stability were rising, suggesting the ECB was eyeing a rate hike.
"All measures of liquidity indicate that liquidity is very ample and the robust pace of credit expansion supports the assessment that the medium and long-term risks to price stability are increasing," Papademos said.
Several economists said skeptics on the Governing Council probably were assured the economy could weather a rate hike after data this week showed third-quarter growth at 0.6 percent quarter on quarter, while inflation was high at 2.5 percent.
