The European Central Bank kept interest rates at 3.75 percent on Thursday as expected and cemented market expectations for a June rate hike to keep eurozone inflationary pressures in check.
Data in the past month has thrown up nothing to shift the ECB's view that the eurozone economy will continue growing solidly and the danger of higher inflation persists, albeit in the medium term, ECB President Jean-Claude Trichet said.
Accordingly, the Governing Council said in its policy statement it would continue to monitor risks to price stability "very closely", wording that has signalled a rate hike remains a few months away.
Trichet endorsed that view in his news conference. "I would not say today anything that would be aiming at changing expectations for the month of June," he said. Financial markets already are braced for the ECB to raise rates for an eighth time by a quarter percentage point to 4 percent at its June meeting. Trichet's apparent blessing provided some relief that the pace of rate hikes is unlikely to speed up, despite recent robust growth data.
"There had been some jitters the ECB could move as early as next month. But with interest rates getting closer to what the ECB would consider a neutral rate, there is not as much urgency as last year," said Dominic White, economist at ABN Amro.
By late afternoon. Euribor futures were pricing roughly an 80 percent chance of a June rate hike and a 40-50 percent chance of a further hike by year end. Stocks eased slightly on prospects of higher rates this year, while the euro resumed its advance against the dollar and the Japanese yen.
The ECB avoided the phrase "strong vigilance", which would have signalled a quickening pace of hikes. Rather Trichet stressed that the ECB's assessment of conditions is the same as in March.
Then it forecast healthy growth continuing this year though at a slightly slower pace than the 2.8 percent in 2006 with price risks remaining on the upside in the medium term. "By resorting to the 'monitor very closely' reference, Trichet clarified that the next rate hike is going to be delivered in June rather than May," said Aurelio Maccario, economist at Unicredit in Milan.
Trichet noted that the ECB takes into account currency strength. The euro has hit a fresh record against the Japanese yen and a two-year peak against the US dollar, factors that analysts say provide the ECB breathing room since it tightens monetary conditions and restrains import prices, especially for oil, up 25 percent this year.
The ECB repeated that above-inflation wage settlements, which are not offset by productivity gains, would ring alarms at the central bank. "Where there are doubts about your present level of cost competitiveness, then of course wage moderation remains absolutely essential," Trichet said.
The European Trade Union Confederation fired a shot across the ECB's bows before its meeting, with General Secretary Reiner Hoffmann telling the Frankfurter Rundschau newspaper: "The European Central Bank should stop tampering with wage negotiations."
ECB policymakers are watching talks between employers and the powerful German trade union IG Metall particularly closely after it demanded a 6.5 percent pay rise for its engineering workers members and threatened strikes.
That may be ending. March's number at 1.9 percent was only just within the mark, core prices were similarly high and businesses are finding more pricing power now unemployment is low, incomes rising and economic sentiment high.
Trichet again warned that price pressures are likely to accelerate later this year. Indeed, the central bank staff project that HICP inflation next year will breach the 2 percent level, a move made more likely given the 8 percent rise in oil prices over the past month.