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Trichet Says ECB May Hike Rates in April, Shakes Markets

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After the European Central Bank (ECB) held interest rates steady on Thursday, its president, Jean-Claude Trichet, shook world markets by saying that a rate hike could come as early as April.

Economists and analysts had not expected that to occur until the fourth quarter, although markets had begun to creep toward expectations of a third-quarter increase. The euro soared on the news as investors rejoiced at the attack on inflation, hitting its highest level since Nov. 8 and nearly reaching the crucial level of $1.40. It held most of its gains into Friday, giving back only a bit, and was expected to move higher on speculation.

Reuters reported that the announcement came during a news conference that followed the ECB’s meeting. Trichet’s announcement that "[t]he position of the Governing Council is that an increase in interest rates at the next meeting is possible," opened the door for questions about the size of the increase and whether it would be only the first in a series of hikes. He dismissed any notion that the ECB would raise rates by more than 25 basis points, and said, "It is certainly not the sense of the start of a series of rate hike increases."

His statement, "Strong vigilance is warranted with a view to containing upside risks to price stability," incorporating the phrase "strong vigilance," was significant because that is the phrase typically used by the ECB in the past to signal that a rate hike was no more than a month in the future. While Trichet said that a rate hike was not already decided, he did say, "When we have a shock—and we have a shock—our responsibility is to prevent a second round of effects [from high oil prices]."

He also said that the ECB would continue to fund banks’ liquidity.