ECB scraps rate increase under pressure from pols, economists

Section:

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, August 28, 2007

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/28/cnecb1...

The European Central Bank is poised to abandon a rate rise planned for early September, bowing to intense pressure from French politicians and a growing chorus of economists across Europe.

Jean-Claude Trichet, the ECB's president, said his use of the term "strong vigilance" (code for rate rise) in early August had now been overtaken by events.

"What I said was before the market turbulences," he said, making his first public appearance since the ECB began injecting E350 billion (£238 billion) of emergency liquidity to prevent a seizure of the credit markets.

The comment was taken by the markets as a climb-down after weeks of raging controversy over the direction of ECB policy. The euro ended its recent rally, falling to $1.3638 against the dollar.

While the US Federal Reserve and the Bank of Japan have both warned that the credit turmoil would spill over into the broader economy, the ECB has so far refused to lower its growth estimates.

The hawkish stand has led to broadsides from French president Nicolas Sarkozy, who claims the bank has endangered Airbus and the French car industry by driving the euro to record levels.

"What's happening on world markets is a rebuke for the ECB. It shows I'm right, and that Trichet shouldn't be considered Europe's sacred cow," he allegedly told aides, later leaked to the magazine Canard Enchaine.

"After causing a liquidity squeeze by raising rates, he's now had to inject liquidity to calm the crisis. We've now got to take advantage of this crisis to bend it [the ECB] to our will," Sarkozy said.

Bert Rürup, head of Berlin's "Wise Men" panel, warned against tightening in the middle of a credit crunch. "Even if the interest rate rise announced can be justified by economic conditions, I would advise against it at this juncture," he said.

The German Chamber of Industry and Commerce has called for a rate freeze.

A survey of top eurozone economists by Germany's Handelsblatt newspaper showed that a majority think rates should be held at 4 percent until the crisis passes. "Looking at the landscape, I can see four good reasons for the ECB to hold off," said Christian de Boissieu, a professor at Paris University. "Inflation looks under control; growth slowed in the second quarter; the dollar is still weak; and, of course, we now have a financial crisis," he said.

Marco Annunziata, chief economist at Unicredit, said: "If they go ahead with a rate rise, it could put the already-strained banking system under severe pressure."

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