FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet on Thursday dispelled any remaining doubt that the central plan
to raise interest rates at its next meeting on July 7.

A day into the purdah period — during which ECB Council members
usually stay mute on monetary policy considerations — Trichet
reiterated that the ECB remains in a state of “strong vigilance” on
inflation.

By using the code words that signal a rate increase is imminent,
Trichet clearly set the stage for a 0.25 basis point increase next
Thursday. Following Trichet’s remarks, the euro moved to a 3-week high
against the dollar.

May’s Eurozone inflation data, also released Thursday, may have
surprised slightly on the downside but at 2.7% it still remains well
above the ECB’s price stability target of close to but below 2.0%.
Trichet said that “going forward, inflation is likely to stay clearly
above 2% over the months ahead, mainly due to energy and commodity
prices.”

M3 money growth accelerated sharpy to 2.4% in May from 2.0% in
April, the central bank said Thursday, though that figure is well below
the ECB’s reference rate of 4.5%. At the same time, Trichet noted that
“monetary liquidity remains ample” and could “accommodate price
pressures.”

While inflationary pressures persist, latest news from the real
economy reaffirmed that the recovery is losing steam.

Economic morale in the Eurozone eroded further in March due to
worsening sentiment in industry, the European Commission said Wednesday.
After at 2.5-point slide since February, Commission’s sentiment
indicator slipped another 0.1 point to an eight-month low of 105.1.

On Thursday, there was surprisingly bad news from the consumer
side. In Germany, retail sales unexpectedly fell sharply in May (-2.8%
m/m), the Federal Statistical Office said. Analysts had unanimously
expected a monthly rise.

French consumer goods spending also surprised on the downside again
in May, with declines in all main categories except energy. After a 2.3%
slide since February, the 0.8% monthly decline left spending 1.8% lower
on the year and April-May outlays 2.3% below the 1Q average

Following a slew of relatively weak data, German economic research
institute DIW slashed the 2Q growth forecast for Europe’s economic
powerhouse to 0.4.% q/q from 0.6% q/q. “The latest ‘hard’ data on
economic developments in Germany point to a significant weakening of
growth,” the institute’ said Wednesday.

In the Eurozone’s raging debt crisis some big relief came yesterday
and today, when the Greek parliament passed austerity measures clearing
the way for further aid.

With Greece pulling back from the brink of default, governments and
banks continue their discussions about a private sector involvement in
the next Greek bailout.

German finance minister Wolfgang Schaeuble said that Germany’s
major banks have agreed to take part in a new aid program for Greece by
accepting longer maturities on some E2 billion in bonds that currently
fall due in 2014. German banks hold some E10 billion in Greek government
bonds but about 55% of them aren’t due to mature until after 2020.

The German deal is “based on a similar proposal put forward in
France,” Schaeuble said. However, Deutsche Bank chief executive Josef
Ackermann said the German deal would be modified somewhat with regard to
the French blueprint.

The ECB, however, has no position yet on the widely discussed
French proposals for a private sector involvement, Trichet said.

“At this stage, we have not yet a position of governments…that we
could examine,” Trichet told the European Parliament. “And I will say at
this stage, we are very alert; we are following what is going on but I
cannot give you a precise judgment or advice on what is going on.”

Executive Board member Juergen Stark Wednesday appeared to reject
any scheme in which the EFSF or European Investment Bank would guarantee
part those new bonds.

Asked whether banks could swap risky Greek paper against bonds
backed by EU governments following the example of Brady Bonds, Stark
said this was “excluded.” He said any such backing “would violate the
no-bailout clause in article 125 of the EU treaty. “We have rules in the
currency union and we must adhere to them,” he said.

Whatever agreement may be reached eventually, Trichet stressed that
the ECB will not take part in any rollover of its Greek bonds. “It is a
private sector involvement. It is not a public sector involvement, so I
said already that we do not envisage to participate ourselves.”

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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