The European Central Bank will raise interest rates next month, according to a firm majority of economists polled by Reuters after its president said the bank will exercise strong vigilance over inflation.
At his news conference on Thursday, ECB President Jean-Claude Trichet said that the bank may raise interest rates next month. His use of the phrase strong vigilance has typically signaled an interest rate hike the following month.
As recently as last week, the vast majority of economists had expected the ECB to wait until the fourth quarter of this year before embarking on an interest rate hike after holding rates at a record low of 1.0 percent for nearly two years.
Now, that consensus has been abandoned completely, with 39 out of 49 analysts now expecting the first tightening since July 2008 to come next month, and nearly all expecting a 25 basis point hike to 1.25 percent.
The ECB's hawkishness of recent weeks was no bluff, said Carsten Brzeski, senior economist from ING.
The ECB just gave a broad hint that the period of record low interest rates is quickly coming to an end. Interest rates remained on hold but Jean-Claude Trichet effectively pre-announced a rate hike at the next meeting in April.
Forecasts from the remaining minority ranged from May 2011 to the first quarter of next year.
Asked at Thursday's meeting whether a potential rate rise in April would signal the start of a round of rate hikes, Trichet said: It is certainly not the sense of the start of a series of rate hike increases.
But economists weren't convinced. Having abandoned calls for steady rates until year-end, the median expectation is now for two more interest hikes by the end of the year, which would leave rates at 1.75 percent going into 2012.
While Mr. Trichet was keen to play down that the envisaged increase on Apr. 7 would be the start of a series, this form of language is similar to that being deployed in December 2005, said Julian Callow, chief European economist at Barclays Capital.
Yet then there was a sequence of 25 basis point rate increases on a quarterly basis during 2006.
(Polling by Bangalore Polling Unit, Additional reporting by Marc Jones in Frankfurt; Editing by Ron Askew)