German minister warns against ECB rate hike

German Finance Minister Peer Steinbrueck warned about the negative impact on growth if the European Central Bank (ECB) raises rates, saying he feared an economic slowdown already taking place could be exacerbated.

"The ECB has to consider that they could possibly send the wrong signal with an interest rate increase because it could have a pro-cyclical impact at a point when the economy is slowing down," he told Der Spiegel news magazine. ECB President Jean-Claude Trichet said last week the ECB was in a state of heightened alertness about inflation and saw an "acute" risk of a wage-price spiral. He repeated that it was possible the ECB would raise rates by a small amount on July 3.

Steinbrueck's comments were highly unusual for a German cabinet member. German government leaders usually refrain from making any critical remarks about ECB decisions. In the past Chancellor Angela Merkel and others have stood up to back ECB independence.

Steinbrueck was not, however, the only leader in the centre-left Social Democrats, who share power with Merkel's conservatives to issue warnings to the ECB.

Rainer Wend, the head of economic policy in the SPD's parliamentary group, told Der Spiegel there was no justification at the moment for higher interest rates.

"The ECB should leave interest rates unchanged so that there are not any further factors to endanger growth," Wend said.

Ludwig Stiegler said he hoped the ECB would rethink any inclination to raise rates by taking a look at dimming economic growth prospects and the developments on the stock markets. "One shouldn't take out the hammer and whack things even harder," Stiegler said. "I hope that a majority on the ECB remains reasonable."

Oil-powered inflation accelerated further in June, compounding the double trouble central bankers must deal with as economic growth slows.

Germany's statistics office reported on Friday the annual inflation rate rose to a near 15-year high of 3.3 per cent in June, from 3.0 in May. In Spain inflation in June was 5.1 per cent, the highest since records began in January 1997. Politicians in Germany, France and Spain have all signalled dim prospects for second quarter gross domestic product growth.

At the ECB meeting next Thursday, 77 of 81 economists polled by Reuters expect the ECB governing council to agree a rise in the key policy rate to 4.25 from 4.0 per cent.