Sept. 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet has made a habit out of telling investors what to expect on interest rates. Now markets are dictating the terms.
Trichet, unsure of how the soaring cost of corporate borrowing will affect Europe's economy, may shelve an interest- rate increase planned for this week, analysts said. Confidence among consumers and companies has already taken a hit, reports on Aug. 31 showed.
``Markets haven't settled enough for the ECB to hike rates,'' said Michiel de Bruin, head of government bonds at the Netherlands unit of London-based F&C Asset Management. ``You have to be very sure there'll be no impact on the real economy from this crisis, and it's too soon to say that.''
Economists say Trichet will wait. Just 11 out of 55 surveyed by Bloomberg News predict a quarter-point increase when the 19- member governing council meets in Frankfurt on Sept. 6.
``Everyone was expecting a rate rise in September because Trichet signaled one,'' said Stewart Robertson, an economist at Morley Fund Management Ltd. in London. ``Things have changed. In the current circumstances, it would be an absolutely bloody- minded thing to do.''
Trichet, 65, has flagged the past eight rate increases by pledging ``strong vigilance'' on inflation. He used those words at a press conference on Aug. 2, signaling rates would rise in September for the ninth time since late 2005.
He retracted the remark on Aug. 27, saying the ECB isn't ``pre-committed'' to higher rates. ``What I said Aug. 2 was before market turbulences.''
Stocks Drop
The Morgan Stanley Capital International World Index declined 11 percent between July 19 and Aug. 16 as credit became more expensive. Overnight borrowing costs between banks in Europe rose as high as 4.62 percent on Aug. 9, compared with the ECB's benchmark rate of 4 percent, prompting the central bank to inject cash into money markets.
``Economic fundamentals still suggest the ECB ought to raise rates, but it can't ignore what's happened on financial markets,'' said Sandra Petcov, an economist at Lehman Brothers International in London. ``There's been a substantial re-pricing of risk and if banks tighten lending standards for households and firms, that could result in the equivalent of a rate increase.''
Trichet's challenge may be easier than that confronting U.S. Federal Reserve Chairman Ben S. Bernanke, who is under pressure to cut rates to shore up the economy, said Annamaria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan.
`Act as Needed'
``The Fed is faced with the possibility of having to invert its monetary policy, but in Europe, even if rates are left unchanged in September, it's probably just a matter of postponing'' an increase, Grimaldi said.
Bernanke told the Kansas City Fed's symposium in Jackson Hole, Wyoming, on Aug. 31 that he'll do what's needed to prevent the credit rout from undoing the six-year American economic expansion.
The Bank of Japan has already stepped back from raising rates and economists expect the Bank of England to leave its benchmark rate at 5.75 percent on Sept. 6, the same day the ECB meets.
``The ECB will reluctantly keep rates at 4 percent, while hinting at the possibility to resume tightening as soon as markets return to normal,'' said Aurelio Maccario, an economist at UniCredit SpA in Milan. ``The ECB's main intention remains to keep inflationary risks in check.''
Inflation Concerns
The Frankfurt-based ECB is concerned inflation will accelerate beyond its 2 percent limit after the economy expanded at the fastest pace since the turn of the decade last year, giving companies more room to raise prices and wages. Money supply growth, which the bank sees as a gauge of future inflation, accelerated to the fastest pace in 28 years in July.
The ECB will publish new growth and inflation forecasts on Sept. 6. It currently expects the euro-region economy to grow about 2.6 percent in 2007 and 2.3 percent in 2008, while inflation is forecast to average about 2 percent this year and next. The bank aims to keep inflation below 2 percent.
There is evidence that the fallout from the U.S. housing- market slump is hurting Europe. Consumer and business confidence dropped more than economists forecast in August, while manufacturing and service-industry growth slowed.
BNP Role
Credit-market turmoil worsened after BNP Paribas SA acknowledged its vulnerability to increasing defaults on U.S. subprime mortgages, which are aimed at borrowers with a poor credit history. Two German banks have since required emergency funding because of their exposure to sub-prime losses.
The ECB and other central banks injected more than $350 billion of extra funds into money markets between Aug. 9 and Aug. 14 to smooth lending between banks. While that succeeded in reducing the overnight rate at which banks lend cash to each other in Europe, three-month rates remain at a six-year high.
``Raising rates in this environment of unrest would send the wrong signal,'' said de Bruin. ``Maybe the ECB will end its tightening cycle sooner than it originally intended.''
