ECB holds rates, endorses chances for September hike

The European Central Bank kept interest rates steady at 4 percent on Thursday and endorsed market expectations that a September hike is quite likely.
ECB President Jean-Claude Trichet told a news conference he did not want to shake market probabilities on ECB rates. Ahead of its meeting, European government debt futures placed a two-third likelihood for a September hike to 4.25 percent and were split on rates at 4.5 percent by year end. "No change in the present market expectations is the message of the Governing Council," Trichet told a news conference.
"It is not our intention to move the market." This statement was somewhat of a surprise after the Governing Council in its policy statement left in place June wording that it would "monitor closely" all inflationary risks - a phrase that usually means a rate hike is at least three months away.
Many economists had expected that Trichet would ratchet up the language this month and say it was monitoring price risks "very closely" to show it was edging toward a September hike. The next step would be to say "strong vigilance".
However, Trichet appears to be keen to wean ECB watchers off code words for clues on the timing of the next rate increases, so as to avoid locking the ECB into a firm schedule. He wants investors to focus more on economic data, especially after delivering 200 basis points of tightening over 18 months.
The change in communication tactic left analysts uncertain just how strongly committed the ECB is to a September hike, given that October is also partially priced into markets.
"The ECB does not yet know whether it will move in September or October. That seems to be the major message from the ECB press conference," said Holdger Schmieding, economist at Bank of America. Trichet left no doubt, though, that he would prepare the ground well if the Governing Council wants to move in September. He said the phrase "strong vigilance" is one that "means really something" and he would find a way to communicate ECB intentions, even though it usually holds no news conference in August, when its rate meeting is held by teleconference. Central bankers world-wide have signalled they are on heightened inflation watch during the current powerful global economic expansion.