•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   
•    EYEWITNESS   

New York. Is this really such a good time to raise interest rates?

This month, the European Central Bank all but promised a rate increase when its governing council meets on April 7. There is no sign, however, that the earthquake in Japan and its aftermath have dissuaded policy makers from their view that rates must rise to preempt inflation.

Economists say the direct economic effects of the earthquake and tsunami on Europe are not huge. But they warn that the prospect of a nuclear disaster, along with continued fighting in Libya and high fuel prices, could further unsettle consumers.

“We see from consumer surveys that people don’t think things are getting better,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. “People feel threatened.”

Analysts expect a rise of a quarter of a percentage point next month, which would be the first of several increases toward as much as 2 percent by the end of this year or early in 2012. The benchmark rate is now half that.

Even before the crisis in Japan, many economists regarded a rate increase as ill-advised when growth in much of Europe was still slow and Spain, Ireland and other countries on the periphery of the euro zone were struggling with debt crises.

A rate increase would raise borrowing costs for those countries when they already have trouble selling debt at rates they can afford.

It would also increase monthly payments for many homeowners with adjustable-rate mortgages.

“An already-too-tight ECB monetary policy is about to get even tighter, with potentially devastating consequences,” Michael T. Darda, chief economist at MKM Partners in Stamford, Connecticut, said last week. “We do not believe the periphery can withstand what appears to be an imminent series of ECB rate hikes.”

Jean-Claude Trichet, the president of the central bank, has left his options open. A rate increase “is not certain, but it is possible,” he said after the governing council’s meeting on March 3.

Some analysts worry that the bank is poised to repeat the mistake it made in July 2008, when it raised the benchmark rate a quarter point, to 4.25 percent, amid a growing financial crisis. In October of that year, after the implosion of Lehman Brothers and the collapse of the money markets, the central bank swiftly reversed course. By May 2009, it had dropped the rate to 1 percent, where it has remained ever since.

The bank could postpone action if the economic aftershocks from Japan worsen. But it is also possible that the central bank, with its relentless focus on inflation, could decide that it needs to act decisively to prevent shortages of energy or Japanese-made components from driving up prices.

“If anything, the effect on global commodity markets could put upward pressure on inflation as the demand for raw materials is increased by the reconstruction efforts,” said Peter Westaway, chief economist for Europe at Nomura in London. “That could put pressure on central banks to raise rates more quickly, not less.”

It is unusual for the European Central Bank to move on rates before the Federal Reserve, which on Tuesday left its benchmark rate near zero. The central bank is also ahead of the Bank of England, which has kept rates steady even though inflation is higher in Britain than in the euro zone.

More than for its counterparts, the central bank’s prime directive is to protect price stability. So while most of the world is riveted by Japan, the bank’s policy makers may focus more on the news on Wednesday that inflation in the euro zone was at an annual rate of 2.4 percent in February, above the official target of around 2 percent.

“The ECB will be very aware that the European Commission’s latest survey shows rising consumer inflation expectations and rising company pricing expectations,” said Howard Archer, chief European and British economist at IHS Global Insight in London. “We doubt that the horrific and tragic events in Japan will deter the ECB from acting.”

The New York Times