The Tech - Online EditionMIT's oldest and largest
newspaper & the first
newspaper published
on the web
Boston Weather: 36.0°F | Fair
Article Tools

The European Central Bank signaled Thursday that it would raise interest rates in September to curb inflation amid an expanding economy. Its president, Jean-Claude Trichet, also vowed to pay “great attention” to volatile developments in global financial markets.

Trichet, who does not usually speak to the news media in August, made an appearance after the bank voted Thursday to keep borrowing costs unchanged. He said the bank would exercise “strong vigilance” to ensure that higher inflation does not appear. The Bank of England also left its benchmark rate unchanged Thursday, at 5.75 percent.

Trichet’s use of that phrase suggested the bank’s benchmark interest rate would rise a quarter of a percentage point, to 4.25 percent, at the next policy meeting, in September — the ninth increase since the end of 2005.

Inflation is now running slightly lower than the bank’s target of below, but close to, 2 percent.

“That they are willing to preannounce a rate increase means they are very confident of the fundamentals,” said Erik Nielsen, chief European economist at Goldman Sachs in London. “They could have gotten out of it if they wanted to, but the market reaction showed they do not need to.”

Trichet also struck a sanguine note about recent financial market turbulence, repeatedly calling it the “normalization” of risk assessments by investors who had ignored the dangers in some types of investments.

Stock markets in the United States, Europe and Asia have been shaken this week by fears of a global spread of financial problems tied to the floundering subprime lending market in the U.S.

Trichet said, however, that the bank is monitoring market turmoil as it makes decisions. “We will continue to observe and have great attention for the developments in the market in the period to come,” he said at a news conference.

Trichet said inflation risks have increased as factory output has neared capacity — which can create supply bottlenecks and lead companies to raise prices amid strong demand — and oil prices have fallen only slightly from their highs of $78 a barrel.

The European Central Bank has previously called on investors to price risks sensibly, and Trichet betrayed some anxiety that the current market convulsions were not what the bank had envisioned.

“We were calling for an orderly and smooth reappreciation of risks, and we asked markets and investors to be as keen as possible to avoid sharp and abrupt corrections,” Trichet said. He urged investors to “keep one’s sang-froid.”

Trichet, echoing comments made this week by U.S. Treasury Secretary Henry M. Paulson Jr. and the World Bank president, Robert B. Zoellick, said most economies are still expanding, and the best that central banks can do is to keep inflation low.

“All we do is pave the way for economic growth to be as sustainable as everyone hopes,” Trichet said.