ECB lets rate cat out of the bag

After months of hawkish talk, European Central Bank (ECB) President Jean-Claude Trichet let the cat out of the bag on Nov. 18.

“After two and a half years of maintaining historically and exceptionally low interest rates...the governing council is ready to make a decision,” Trichet said at a Frankfurt European banking conference on Nov. 18.

The market and most currency analysts interpreted this as a clear sign an initial hike will occur at the Dec. 1 policy meeting, with additional rate hikes following in 2006.

With higher energy prices pushing headline inflation to uncomfortable levels for the inflation conscious ECB, officials have been warning for months that a rate hike may be in the cards.

But ahead of the unexpected Nov. 18 comments by Trichet, most analysts had expected the ECB to wait until early 2006 to make their first policy move. The ECB has kept its key refinancing policy rate unchanged at 2 percent since June 2003.

“The comments were a surprise — they came out of the blue,” says Jamie Coleman, managing director at Thomson Financial IFR. While these comments “practically cement” a .25 basis point rate hike at the early December meeting, he says, the question for currency traders is how much more tightening can be expected — and can it reverse the recent weakness seen in the Euro/U.S. dollar?