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[marketmaven]

ANYONE CARE? : Trichet signals imminent rate hike

By Steve Goldstein, MarketWatch
Last Update: 10:24 AM ET Nov. 18, 2005

LONDON (MarketWatch) -- European Central Bank President Jean-Claude Trichet on Friday sent the clearest signal yet that the central bank will lift interest rates at its next meeting.

Trichet told a conference in Frankfurt the "governing council is ready to take a decision" after holding its key rate at 2% since June 2003 to compensate for a slow growing Western European economy.

He added the central bank is prepared to "moderately augment" rates. With growth picking up -- euro-zone GDP grew at a quarterly 0.6% clip in the third quarter from 0.3% in the second quarter -- and annualized inflation above 2.5%, markets have been anticipating that the central bank would soon move to lift interest rates.

Trichet had previously sounded concerns that energy price rises would spill over into other prices, such as wages, though he's also consistently denied there's been any evidence of what are called "second-round" effects from energy price climbs.

At the press conference following the ECB's November decision to hold pat, Trichet also was forced to deny that there was dissension among the governing council amid more hawkish comments from other members.

Trichet's comments on Friday helped the euro recover from early losses, though lately the shared currency was down 0.25% at $1.1714.

LONDON (Dow Jones)--European government bond prices sharply fell Friday after European Central Bank President Jean-Claude Trichet offered a clear signal that the ECB will raise interest rates at its next meeting Dec. 1. "After two and a half years of maintaining historically and exceptionally low
interest rates...the governing council is ready to take a decision," Trichet said at a German banking conference, adding that the council is ready to "moderately augment" interest rates.

Trichet has given the "clearest indication one could hope for" that rates will rise next month, said Robert Prior, European economist at HSBC in London. "We believe it is no coincidence that it follows yesterday's so-called non-policy meeting at the ECB where a new line was obviously agreed," he said.

The ECB's refinancing rate currently stands at 2% and was last adjusted in June 2003, when the central bank cut rates 50 basis points. Bunds and Euribor futures slumped on Trichet's comments, which investors interpreted as removing any remaining uncertainty about December's rate decision. Gilts and short sterling futures fell in sympathy, but outperformed their
counterparts given the divergent U.K. and euro-zone interest rate outlooks.

The main questions now are how much will the ECB hike by in December and what is the likely course of rates through 2006, HSBC's Prior noted. "On the first, we think it highly likely that it will be a 25-basis-point move. On the second, we had pencilled in a second and final hike in March next year and are sticking to that for the time being," Prior said.

HSBC will review its forecasts around the middle of December.
By 1525 GMT, the December bund future on Eurex was down 0.95 at 119.25 and the benchmark 10-year bund was 0.87 lower at 97.65 to yield 3.54%. Euribor futures were pushed lower across the curve and dealers said the September contract, which was down 0.14 at 97.005, is implying three 25-basis-point hikes from the ECB by autumn 2006.

At the same time, the December gilt future on Liffe was down 0.35 at 112.77 and the 4.75% gilt due 2015 was 0.23 lower at 103.91 to yield 4.27%. The March short sterling future was down 0.02 at 95.43. "Gilts are in a relatively better position because there's still a chance that the Bank of England could cut rates next year," said one London trader.

A number of near-term rate hikes by the ECB should help the U.K. economy via a fall in the value of sterling against the euro, noted Standard Chartered economist Gavin Redknap.

But in the medium term a stalling euro-zone recovery can "only heap more bad news" on the U.K. economy and Standard Chartered remains confident that the next move in U.K. rates will be down.