By allowing ads to appear on this site, you support the local businesses who, in turn, support great journalism.
ECB raises key rate to 4.25 percent
Europe Inter 5079792
Jean-Claude Trichet, President of the European Central Bank ECB reacts during a news conference in Frankfurt, central Germany, Thursday, July 3, 2008. The European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25 percent in an effort to rein in escalating inflation in the 15-nation euro zone. - photo by Associated Press
    FRANKFURT, Germany — Wary of higher energy and commodity prices, the European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25 percent, a move it hopes will help curtail rising inflation in the 15 countries that use the euro.
    The move comes despite worries in some quarters that it could dampen growth, but ECB President Jean-Claude Trichet said at a press conference that the fundamentals of Europe’s economy ‘‘are sound’’ and that the bank was focused on inflation — which he said could remain high ‘‘for a more protracted period than previously thought.’’
    He did not signal when rates might go up again, as he did at last month’s meeting. The increase was the first since June 2007.
    Thursday’s move was widely expected, and Trichet said the decision was unanimous among members of the bank’s governing council.
    ‘‘The decision was taken to prevent broadly based second-round effects and to counteract the increasing upside risks to price stability over the medium term,’’ Trichet said. Second-round effects mean an inflationary spiral when expensive gas and food begin to fuel workers’ higher wage demands.
    He seemed to imply one hike might be enough: ‘‘The monetary policy stance after today’s decision will contribute to achieving our objective of price stability,’’ Trichet said. ‘‘I have no bias and we are never pre-committed.’’
    Howard Archer, the chief UK and European economist for Global Insight in London, took that to mean that the bank had clearly moved itself back into a neutral stance.
    ‘‘The ECB’s statement and Mr. Trichet’s comments do little to support the view that this could be the first of a series of interest rate hikes,’’ he said in an e-mail. ‘‘There was no reference to the ECB being in a ’state of heightened alertness’ or ’strong vigilance,’ thereby suggesting that no further interest rate hikes are currently planned in the near term at the very least.’’
    Trichet has stressed that his main objective is to keep prices stable, and all but promised an increase this month at last month’s meeting. But he had also suggested that repeated interest rate hikes are probably not likely.
    On Monday, Eurostat, the E.U. statistics agency, said inflation in euro nations hit a record 4 percent in June, double the ECB’s inflation target of below or around 2 percent.
    Last month Trichet’s signal of higher rates sent both the euro and oil up; higher euro zone interest rates tend to strengthen its currency higher against the dollar as investors park money where it earns more interest. A sinking dollar meanwhile has tended to boost the price of oil.
    But his comments Thursday left the euro down at $1.5765 from $1.5888 the evening before, while oil prices, which had briefly soared to a record near $146 a barrel, fell back slightly, up 51 cents on the day to $144.08 a barrel in electronic trading on the New York Mercantile Exchange.
    Earlier in the session, it rose as high as $145.85 a barrel, a new trading record. With the latest spike, the price of crude has risen more than 50 percent since the end of last year, when oil was going for $96 a barrel.
    Even though today’s higher rate is expected to slow inflation, fears persist that economic growth will slow further as money becomes more expensive to borrow, and oil will get more expensive. Trichet, however, appears to have targeted inflation as the bigger threat, even while countries, trade groups and government officials around Europe lamented higher rates.
    Pervenche Berès, the chair of the Committee on Economic and Monetary Affairs of the European Parliament in Brussels questioned the ECB’s decision in a letter sent to the press after the bank’s announcement.
    She noted that a ‘‘significant component of this rise in inflation consists of imported inflation, and wonders what impact this interest rate increase can have,’’ the letter said.
    Meanwhile, the European Association of Craft, Small and Medium-sized Enterprises, or UEAPME in Brussels, said ‘‘a hike in interest rates is not the correct way to tackle the rising inflation in the EU, which is mainly due to external ’shock factors’ such as high oil and commodity prices.’’
    Instead, it said that the decision would likely to put pressure disproportionately on the real economy. ‘‘Today’s decision must not be the first of a series,’’ the association’s statement warned.
    AP Business Writer Aoife White in Brussels, Belgium, contributed to this report.

Sign up for the Herald's free e-newsletter