ECB hikes to continue in coming months: Smaghi

07 Aug, 2006

Euro zone interest rates are still "very accommodating" after Thursday's hike and more adjustments should be expected in coming months, the European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview.
The ECB's quarter-point hike to 3.0 percent was its fourth since December 2005. Bini Smaghi told an Italian newspaper in an interview published on Sunday that this trend would continue, though the pace would depend on how the economy develops.
"Even after the increase decided on Thursday it cannot be denied that the current level of rates - 3 percent - means monetary policy is still very accommodating, given that the nominal yield is rising at a rate of above 4 percent," he told Il Sole 24 Ore."For that reason we should expect the process of adjustment in interest rates to continue in coming months," he said. "The rate will depend on the underlying development of the European economy."
ECB President Jean-Claude Trichet, explaining this week's rate hike, had no sympathy with suggestions that growth in the euro zone or globally was cooling and that the ECB risked tightening rates so much that it could cause a downturn. He said indicators were "very impressive".
Bini Smaghi said that to understand why rates had gone up in recent months, it should be recalled that at the end of last year euro zone rates were "at very low levels, 2 percent in nominal terms and practically zero net of inflation".
The recent acceleration in rate hikes "is explained by the fact that in the first half of the year, growth was stronger than expected", he said.
Asked whether the Middle East crisis, high oil prices, signs of a US economic slowdown and a strong euro were risk factors, Bini Smaghi said that "for the time being the greatest risk is of an inflationary nature" best avoided by interest rate hikes.

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