ECB FOCUS-This time, politicians content with rate rise

* EU politicians raise no public objection to rate rise

* Even weak peripheral countries say can handle modest hike

* Upholding ECB inflation-fighting credentials seen as key

By Paul Taylor

PARIS, April 6 (Reuters) – If silence means consent, then
the European Central Bank will enjoy an almost ideal political
environment on Thursday when it is expected to announce its
first interest rate hike in nearly three years.

In contrast to the ECB’s previous monetary tightening cycle,
when French President Nicolas Sarkozy publicly criticised the
central bank, there has hardly been a squeak from euro zone
political leaders this time at the prospect of incrementally
higher borrowing costs.

The absence of protest partly reflects the fact that during
the past several months of increasingly explicit hints by ECB
policymakers, governments and markets have had time to adjust to
the prospect of a quarter-percentage-point rise to 1.25 percent
in the ECB’s refinancing rate, which it uses to lend to banks.
And they see little harm to their economies.

“I think we can absorb it without any problem at all,”
Spanish Economy Minister Elena Salgado said on March 22, even
though her country is struggling to return to growth after a
deep recession and the bursting of a real estate bubble.

The silence may also indicate Europe’s politicians are more
respectful of the ECB and its chief, Jean-Claude Trichet, after
the role that the central bank played in stabilising the
financial system during the last three years of economic crisis.

The hardest-hit countries are still deeply dependent on the
central bank for continuing support in the form of unlimited ECB
loans for their commercial banks.
“Twenty five basis points is not the end of the
world…considering what some ministers have provoked in markets
with unconsidered remarks. They caused movements that went much
beyond 25 basis points, so we should not bedevil the ECB for
moving 25 basis points,” one euro zone official source said.

Diplomats said no one even raised the issue when Trichet
attended a European Union summit in Brussels on March 24-25.

Furthermore, even governments in the weakest states may
share the ECB’s belief that it needs to do something about
inflation before the problem worsens further. Euro zone
inflation hit 2.6 percent in March, the highest since 2008 and
above the ECB’s target zone of close to but less than 2 percent.

European governments share an interest in preserving the
ECB’s inflation-fighting credibility because bond market jitters
over inflation could boost yields sharply, making them pay more
to borrow as they struggle with their sovereign debt mountains.

It remains to be seen whether things will stay so quiet if,
as markets expect, the ECB proceeds with further hikes to reach
1.75 percent in the fourth quarter. That would raise the cost of
servicing public debt significantly in tough fiscal times.


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Sarkozy lobbied publicly against the European Central Bank’s
last interest rate rise to 4.25 percent in July 2008, arguing it
would do nothing to address the root causes of consumer price
increases: soaring imported oil and food costs.

“Today’s inflation…is caused by exploding commodity prices
so don’t try to tell me rates must rise to fight inflation,” the
French leader said at the time. “You can double, triple interest
rates, but that won’t allow you to lower Brent oil prices.”

The same case could be made now; what impact will an ECB
rate rise have on oil prices swollen by civil war in Libya and
instability in the Middle East, or food and commodity prices
drive by roaring Chinese and Indian demand?

But the fact that politicians are not making this argument
now suggests there is some sympathy around the euro zone for the
argument of monetary hawks, particularly those in Germany, that
the ECB needs to be seen to be acting if it is to prevent an
upward spiral of inflation expectations and wages.

When the ECB ignored his strictures in 2008, Sarkozy’s
office circulated proposals to force the central bank to publish
minutes of its votes and hold formal contacts with a secretariat
that Paris wanted to create for the euro zone. Those ideas were
quietly dropped in the face of firm German opposition.

France usually screams loudest when interest rates rise,
partly because an independent central bank dedicated to fighting
inflation is new to its political culture, but also because two
of its key exports, aircraft and cereals, are priced in dollars.

The euro is trading above the $1.40 level which European
officials identified before the crisis as the “pain threshold”
for exporters. Markets anticipate a widening transatlantic
interest rate gap as the Fed keeps monetary policy loose.

But International Monetary Fund Managing-Director Dominique
Strauss-Kahn, seen as a possible candidate in France’s
presidential elections next year, dismissed exchange rate
concerns as insignificant in an interview with Italy’s La
Repubblica daily on Wednesday.

“Germany is proof that you can be competitive at 1.40 and at
1.60,” he said.

Sarkozy, facing a difficult re-election campaign next year,
has said nothing about the looming ECB rate decision in public
so far. Privately, a French official who reflects government
thinking did however question the rationale behind a hike now.

“Economic growth is not yet up to potential. The risk of a
wage spiral seems slight….But the ECB’s mandate relates to
headline inflation, not core inflation, which is much weaker,”
the official said.

“A quarter-point rise won’t fundamentally change things, but
growth is still far from potential and we haven’t yet returned
to pre-crisis levels” of output, he added.


In a one-size-fits-all monetary policy area, the pace of
Germany’s booming economy, by far the biggest in Europe, is
inevitably the key parameter for the central bank.

The countries with most to fear from a rate rise are Greece,
Portugal and Ireland, desperate to rekindle growth to service
their debts, and with banks hooked on ECB liquidity.

However Pier Carlo Padoan, chief economist of the
Organisation for Economic Co-operation and Development, said a
minor rise would not threaten the euro zone’s weakest members,
which are already paying high interest rates in the market.

“That is not a source of concern. They would gain from
inflationary expectations being (kept) down because this would
keep market interest rates down,” Padoan said.

Higher rates may tip some Irish or Spanish home-owners with
floating rate mortgages over the edge, although a Bank of
America study of Spanish households’ ability to service their
debts concluded the costs should remain bearable this year.

In Germany and Austria, where politicians rarely comment on
central bank decisions, business associations have generally
been supportive of a modest rate increase.

“We’re quite relaxed,” said Heiko Stiepelmann of the German
Construction Industry Federation. “At some point, there comes a
pain threshold, but we’re far from that point. Interest rates
will be low even if there are two or three more hikes.”

A rare dissenting voice came from Christoph Leitl, president
of the Austrian Chamber of Commerce, who warned that an ECB rate
rise would shackle investment in a fragile economic recovery in
Austria and Europe in general, and throttle consumer demand.

“In the current situation, this is particularly harmful for
growth in European states,” he said in a statement.

(Additional reporting by Jan Strupczewski in Brussels, Paul Day
in Madrid, Annika Breidthardt and Rene Wagner in Berlin, Leigh
Thomas in Paris and Michael Shields in Vienna; Editing by Andrew

ECB FOCUS-This time, politicians content with rate rise