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Liikanen Says ECB `Not Fixed' on Size of Future Changes in Interest Rates

June 19 (Bloomberg) -- European Central Bank council member Erkki Liikanen said the bank can raise borrowing costs by any amount necessary when it sees inflation risks, suggesting policy makers have not ruled out quickening the pace of interest-rate increases.

``If there is any risk, then we need to act,'' Liikanen, who also heads the Finnish central bank, said in an interview in Helsinki on June 16. ``We are not fixed, neither as far as timing is concerned nor size. When it's necessary to take decisions, we take them.''

The ECB raised its benchmark rate for the third time in six months on June 8, by a quarter point to 2.75 percent, and signaled further increases may be needed to keep inflation in check amid near-record oil prices and faster economic growth. Futures trading shows investors expect the ECB to continue tightening by at least 25 basis points per quarter, taking the main rate to 3.25 percent by the end of the year.

The yield on the three-month Euribor futures contract for December delivery rose 4 basis points to 3.49 percent after Liikanen's comments were published. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

Liikanen, 55, said rates are still ``low'' and stimulating economic growth in the 12-nation euro region while there is a risk that inflation, which stood at 2.5 percent in May, may accelerate further.

`Not Tolerable'

``We have withdrawn stimulus in three steps, but still today the stance is accommodative and supports growth,'' Liikanen said. ``The risks to price stability are on the upside, so we need to monitor very closely and remain very attentive.''

His German counterpart Axel Weber said today that euro-region inflation is ``above tolerable levels'' and warrants ``vigilance,'' a word policy makers have used in the past to signal future rate increases.

Stocks have tumbled in the past month on concern central banks will hurt economic growth by raising interest rates too much. The Morgan Stanley Capital International World Index, a measure for stocks globally, lost 9.2 percent since reaching a six-year high on May 9. The Dow Jones Stoxx 600 Index, a pan- European benchmark, dropped 9.8 percent in that period.

`Risk' of Faster Pace

Investors expect the U.S. Federal Reserve to lift its benchmark rate to 5.25 percent on June 29, the 17th consecutive increase, and the probability of another increase in August stands at 63 percent, according to trading in futures contracts tied to the federal funds rate. ECB President Jean-Claude Trichet said the bank's 18-member governing council considered raising rates by half a point at its last meeting.

``If global growth holds steady in the second half of the year, as our central forecast currently assumes, then it is likely that the pressure for a quicker pace of policy normalization will increase,'' said David Mackie, chief European Economist at JP Morgan in London. ``The risk of the ECB accelerating the pace is there and more prominent than markets are willing to consider.''

Liikanen said it's important that central banks ``stick'' to their commitment to maintain price stability. ``If inflation goes out of control, economic history shows that before long it creates major growth problems.'' Euro-region growth is ``broad-based'' and ``close to potential,'' which the ECB defines as around 2 percent.

The bank last week held its growth forecast for this year at 2.1 percent, which would match the fastest pace since 2000, and increased its inflation forecast to 2.3 percent from 2.2 percent. The bank aims to keep inflation just below 2 percent.

Oil Threat

Liikanen said the main inflation threat stems from oil prices, which rose to a record $75.35 a barrel on April 21 and traded at $69.46 today, still 17 percent higher than a year ago.

While higher oil prices have been slow to spill over into other costs and their impact on wages has been ``limited,'' the ECB must ensure ``that it remains so. If there were any secondary effects of course that would make the situation worse,'' Liikanen said.

Monetary developments are also ``extremely important for us'' in the current situation. Money supply, which the ECB uses as a gauge for future inflation risks, grew the most in almost three years in April, and loan growth was the fastest since the bank took charge of monetary policy in 1999.

In a section of the ECB's latest monthly report published last week, the ECB said money supply indicators point to inflation remaining above 2 percent through to at least the first quarter of 2009.

The ECB will ``monitor closely'' all developments, Liikanen said. ``We have seen that risks for price developments are on the upside. When we need to act, we act.''

Funny how they have inflation over the channel - BoE dont see any here :rolleyes:

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Mervyn sees it. He just does not want to spend more time with his family just yet.

True - Sunday Times had a half-page spread on how Mervyn King and Brown are currently at loggerheads

Woodyabelieveit? - Gordon Brown having strop with someone?????

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When are the BoE going to stop this farce, they have to act soon before we are the laughing stock of the developed world :angry:

I kind of hope they dont, then the markets will intervene and do their stuff

Last time round the Tories had their Black Wednesday when Lawson had to [temporarily] put IRs to 15% before they returned later in day [a fact conveniently erased in the NuLab 'no return to boom & bust' myth]

How would the 'independent' BoE react a run on Sterling? - sit and wait till the next meeting while the pound goes into freefall, or would they have to step in with an emergency series of meetings throughout the day till it was resolved? [probably with Browns muppets calling for rate-cuts a la Nickel :-)]

Would love Brown to have his ERM moment

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The market may set the rates for Gordon and his BoE:


LONDON (AFX) - European government bonds came off day lows but remained depressed amid indications that the European Central Bank will continue hiking interest rates over the coming months.
ECB rate setter and Bundesbank president, Axel Weber, re-ignited talk that the central bank may speed up the pace of monetary tightening when he said the central bank should act preemptively to preserve price stability.
The inflation rate in the euro zone is still above the European Central Bank's threshold, and it is therefore necessary to "adjust monetary policy", Weber told reporters.
Indeed, this appears to be the line adopted by other ECB rate setters as well. Finnish central bank chief, Erkki Liikanen said Friday that European borrowing costs were still low and could be raised sharply to combat inflationary pressures.

If the world bond markets continue to drop as rates rise the UK cannot stand alone and rates will automatically rise. The IR we pay on our mortgages may be in the process of disconnecting from the central bank rate as they have done in the US for a number of years. The US ARM (adjustable rate mortgage) is currently 7.2% with the Fed at 5%. Several VIs have hiked in recent weeks (NU hiked this morning) despite no action from the BoE. This is going to be interesting because we may find the effective mortgage rate will enjoy the same spread as in the US--about 2.2%. A 2% hike in the mortgage rates should do nicely.

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  • 317 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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