BCE quiere dejar los tipos de interés como poco al 4%

FRANKFURT, Sept 18 (Reuters) - The European Central Bank expects to continue raising interest rates in 2007, possibly above 4 percent, if its scenario for trend growth unfolds and inflation risks worsen, euro zone monetary officials told Reuters.

One well-placed, senior euro zone monetary source said the ECB's key rate, now at 3 percent, can be expected to reach "at least" 4 percent by the end of next year, assuming the baseline economic scenario materialises.

"I expect we will carry on hiking beyond 3.5 percent. Under the base scenario, the output gap will close early in 2008. Before then, by the end of 2007, rates should be at least 4 percent," the senior monetary source said.

"But we'll have to see if that's enough. They may need to go a bit higher," he said.

So far ECB policymakers have withheld official comment about the course of monetary policy beyond endorsing market pricing for a move to 3.5 percent by the end of 2006.

But they have made it increasingly clear that the door is open to higher rates, assuming a series of economic headwinds do not disrupt the favourable euro zone growth outlook for 2007.

Four euro zone central banking officials who spoke to Reuters said fresh economic projections in December would play an important role in shaping ECB Governing Council thinking, and several said the debate on next year is only just beginning.

But the senior euro zone monetary official said the ECB expected growth to remain solid, allowing more hikes.

"Of course we adjust things according to the data and if the economy slows more sharply than we expect, then we will have to change course. But that is not what we envisage," this source told Reuters.

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A second euro zone central banker said that by the end of this year the ECB "must be free to discuss" raising interest rates beyond the 3.5-4 percent zone, which is widely viewed as neutral -- one that neither stimulates nor restricts economic growth in the 12-nation euro zone.

He also mentioned the closing of the output gap as a factor the ECB is watching, as did a third euro zone central banker.

"The output gap is closing, employment is rising, so better growth is having an impact on the labour market and will eventually flow through to wage demands," this third monetary source said.

DECEMBER FORECASTS

A fourth euro zone monetary official was less certain about the monetary policy course beyond year-end and noted that there was a cautious camp within the ECB Governing Council who were not keen to get rates into restrictive territory.

Two more rate hikes this year to 3.5 percent "are a done deal" as long as nothing surprising happens on the data front, this fourth source said.

"For 2006 the orientation is clear. For 2007, the script is still unclear," he said.

Uncertainties revolve around whether the recent downward trend in oil prices becomes entrenched; the impact of a German sales tax increase next year on domestic demand; what happens to the euro exchange rate especially if the U.S. stops tightening rates; and whether disinflationary pressures from globalisation are waning, the monetary sources said.
If growth keeps up its solid pace and if oil prices stay high, then risks of second-round inflationary effects would grow in an economy that has already seen price gains consistently well above the ECB's comfort level. Hence further rate hikes would be needed, the fourth source said.

The third central banker said that if inflationary risks were to heighten, then further rate action was most likely.

"In December, we will have new projections so this would be the time to rethink the monetary policy orientation again," he said.

The Governing Council's base scenario for the economy is the same as the mid-point of ECB staff quarterly economic projections.

Currently, ECB staff project GDP growth in 2007 in a 1.6-2.6 percent range for a midpoint of 2.1 percent, compared with 2.5 percent this year. Inflation is seen in a 1.9-2.9 percent range for 2007 for a 2.4 percent midpoint.

LEADING INDICATORS

The first source said the recent softening of leading economic indicators had been expected by the ECB after a period of strong growth, and this did not derail its overall outlook for growth to continue around potential next year.

In recent days, ECB Governing Council members have made similar comments.
The softening of the leading indicators should be seen as a physiological reaction after they went so high, and it doesn't signify any change to our base scenario for growth set out in the last staff forecasts," the source said.

"Of course if they continue to weaken for some time that would be a concern, but at the moment there is nothing to worry about."

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