Hawkish ECB expected to maintain rate

The ECB will probably keep interest rates at a sevenyear high this week and may even threaten to raise them because of the prolonged economic slump.

All but one of 47 economists surveyed by Bloomberg predict the ECB will leave the bench¬mark rate at 4.25 per cent on Thursday, while just five expect a cut this year, even after the economy contracted in the sec¬ond quarter.

Its refusal to lower borrow¬ing costs after inflation hit a 16year high risks pushing the economy into a recession, economists said.

Here in Thailand, however, inflation pressures eased in August when inflation rose 6.4 per cent, slower than its peak in July of 9.2 per cent and 8.6 per cent in June.

With a slower pace of infla¬tion, many expect the Bank of Thailand (BOT) to hold its poli¬cy signal rate at 3.75 per cent until next year before easing it in the second half of 2009.

However, inflation predic¬tions could be premature given oilprice volatility, which is not easy to project.

A BOT senior director, Amara Sriphayak, said yesterday that fiscal and monetary policies helped anchor inflation, which lessened pressure on wage adjustments.

The global economic slow¬down could lower demand for oil. However, she warned oil prices could be volatile due to Hurricane Gustav in the US. Volatility saw investors predict the rate direction incorrectly.

"Investors assumed the ECB would soften its inflationfight¬ing stance," said Ulrich Katz, a Munichbased portfolio manag¬er at Pacific Investment Management, which has more than US$800 billion (Bt27.3 trillion) under management. "Well, it clearly hasn't."

ECB policymakers Axel Weber and Lucas Papademos said last week that it remained focused on inflation risks and may need to lift rates again if these intensify. Bank executive board members Lorenzo Bini Smaghi and Juergen Stark stepped up their inflationfight¬ing rhetoric, too, just days before they meet to decide on rates.

"The comments were a wakeup call to the markets, which had got ahead of them¬selves in light of dire economic data," Katz said.

Some investors started bet¬ting on a rate cut by early next year after ECB president JeanClaude Trichet said early last month that economic growth would be "particularly weak" through the third quarter.