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ECB considers rate raise

U.S. Treasury Secretary Henry Paulson

TEXT OF INTERVIEW

Scott Jagow: Treasury Secretary Henry Paulson is in Europe this week, and the big story is interest rates. On Thursday, the European Central Bank will decide whether to raise rates.

Let's bring in our European correspondent, Stephen Beard. Stephen, what's the ECB gonna do?

Stephen Beard: Yesterday, we got shock inflation figures indicating that the inflation rate had jumped to 4 percent, its highest ever. So analysts say that clinched it, and it's almost certain that the ECB are going to push up interest rates this week.

Jagow: Which I know does not make Paulson very happy. Is he trying to convince the ECB otherwise?

Beard: Well, I don't know whether he's going to try to persuade them not to. He's will certainly point out the obvious paradox here. The ECB is worried about inflation. One of the key components that would push an inflation is the ever-rising price of oil. But if the ECB puts up Euro interest rates, that may put downward pressure on the dollar, which would push up the price of oil.

Jagow: Yeah, it's a tough situation.

Beard: It is!

Jagow: Well, what is the European Central Bank's argument?

Beard: The European Central Bank, when it spoke about this last month, indicated that it is very concerned about inflation -- not just from oil, but also rising food prices. And really, the European Central Bank has become kind of boxed in here -- it's a matter of credibility now. This is a bank that is still only 10 years old, it has to always convince the markets that it is serious. It would be very damaging to the ECB's image if it caved in to political pressure -- certainly from a U.S. finance chief.

Jagow: And finally Stephen, what does this portend for the Federal Reserve? If the ECB does raise its interest rate, what kind of position does that put the Fed in, or does that not matter?

Beard: Well, it certainly does matter, and it makes life a lot more difficult for the Fed. It's quite clear that the Fed would like the option of being able to lower U.S. interest rates even further. But if you've got rising Eurozone interest rates, that becomes increasingly difficult, because it means it could tip the dollar into free fall. And certainly, the Fed doesn't want to see that.

Jagow: All right, Stephen Beard in London. Thank you.

Beard: OK, Scott.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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