E.C.B. Signals Interest Rate Increase in July

However, the euro fell against the dollar after Jean-Claude Trichet, the E.C.B. president, set up a conflict with the German government by rejecting any suggestion that creditors of Greece should be forced to share the burden of a rescue plan.

“We are not in favor of restructuring, haircuts and so forth,” Mr. Trichet said at a press conference following the E.C.B. governing council’s monthly meeting on monetary policy.

His statements were an implicit rebuke to Wolfgang Schäuble, the German finance minister, who said Wednesday that holders of Greek bonds should swap them for debt that the country would have longer to repay.

“President Trichet has gone on a collision course with the German government,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, said in a note following the press conference.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy was still too weak to cope with higher borrowing costs.

In the 17-country euro zone, the E.C.B. has been more fixated on inflation, which has been pushed up by rising food and energy prices.

“Strong vigilance is warranted,” Mr. Trichet said. That language would indicate that a rate increase in July is probable, though the bank always leaves its options open. At the same time, E.C.B. economists slightly lowered their forecast for inflation next year, suggesting that the bank may feel less pressure to raise rates quickly.

On Thursday, the E.C.B. left its benchmark rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. Inflation in the euro area was 2.7 percent in May. “When I compare inflation today to interest rates I see a negative number,” Mr. Trichet said.

The benchmark rate in Britain was left at 0.5 percent and the central bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $328 billion.

The E.C.B. said it would continue its emergency support of euro area banks by continuing to grant them unlimited low-interest loans at least through September.

With Germany, Europe’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn. But the bank faces a dilemma because the Greek debt crisis still threatens growth in the euro zone as a whole. Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it harder for those countries to recover.

Mr. Trichet argued that the best way to help the European economy was to make sure that prices were contained. “It is good for all countries,” he said.

Questions about Greece dominated the E.C.B. press conference, but Mr. Trichet showed no sign of being willing to consider a Greek restructuring, unless it was completely voluntary on the part of creditors — a scenario that is difficult to imagine.

On the contrary, he implied that any restructuring of Greek debt might prompt the bank to stop accepting the country’s bonds as collateral, a move that could be fatal for some Greek banks that depend on cheap E.C.B. loans.

“It is difficult to see how this debate will be resolved,” said Marie Diron, senior economic advisor to Ernst Young, the consulting firm. “Someone, either the E.C.B. or the German government, needs to make some concessions to reach a compromise,” she said in a note. “And this needs to happen soon as time is running out for Greece to refinance its debt.”

Though it does not belong to the euro area, Britain also remains fragile economically. Consumer confidence worsened in April as more people claimed unemployment benefits and as wage increases lagged behind inflation, weighing on living standards. Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

“The story of weak growth is still going to continue for a while,” said James Knightley, a senior economist in London for ING Financial Markets.

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