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ECB raises rate to 3.25 percent, hints at another increase

ECB raises rate to 3.25 percent, hints at another increase

The European Central Bank, sticking to its tough line on inflation, raised its key interest rate by a quarter of a percentage point to 3.25 percent on Thursday and hinted that another rate increase is in the offing before next year.
The move will likely mean higher borrowing costs on auto loans and mortgages in the 12 nations that use the euro, as ECB President Jean-Claude Trichet said he expects the region's economy to continue growing through the rest of this year and into next.
"Conditions remain in place for the euro-area economy to grow at solid rates," Trichet said, while cautioning of some volatility around the turn of the year. "Global activity has become more balanced ... and robust."
Trichet also said the bank would "monitor very closely" inflationary pressures, a phrase he has used after previous rate increases and a signal that another rate increase could be likely in December. The ECB has not raised rates at consecutive meetings since it began tightening monetary policy last December.
Analysts had widely expected the bank's quarter-point move, and many predict rates will rise to 3.5 percent by the end of the year.
"Mr. Trichet's wording in the press conference confirms that the ECB is not finished yet," said Marco Kramer at HVB. "We expect another rate increase in December but no additional tightening next year as downside risks to economic growth are likely to increase considerably in 2007."
Trichet said the bank's Governing Council did not consider a half-point increase at this meeting and its decision for the smaller increase was overwhelming. But he said that the bank would move to tighten monetary accommodation if the need arose.
"I would say nothing else as regards to future moves until the end of the year," he said, but added that "if the market has in mind moves, I would not say anything that would correct this sentiment."
Analysts have warned that a slowdown in economic activity worldwide and lower oil prices and a weaker dollar could lead the ECB to pause.
"We will see what we have to do," Trichet said. "We always do what is necessary to deliver price stability."
Thursday's move was the fifth quarter-point rise since December, when the euro zone's economy started picking up. The recovery has been broadly sustained, with demand for credit still strong in the 12-nation zone that has more than 313 million people and a combined gross domestic product that accounts for 14.8 percent of the world's GDP.
Inflation appeared to pose less of a threat in September, when euro-zone prices were up 1.8 percent over the preceding 12 months, according to the statistics agency Eurostat _ below the ECB's goal of close to, but below 2 percent, for the first time since January 2005.
Trichet said the drop in oil prices wouldn't affect the medium-term outlook for inflation, which he said should slow further to below 2 percent. He also dismissed fears of a severe cooling in the world's biggest economy that could hinder the euro zone.
"Our baseline scenario remains that slowing down in the U.S. will be moderate, in line with a soft correction," Trichet said. "In the trade channel the U.K. is more important for us than the U.S."
The Bank of England held its key interest rate steady at 4.75 percent on Thursday for a second consecutive month. Denmark's central bank raised its main lending rate to 3.5 percent from 3.25 percent, echoing the ECB's move.
The ECB decision did little to buoy the euro, even though higher rates can bolster a currency by making certain types of investments more attractive. The euro fell to US$1.2678 in late European trading from US$1.2713 the night before in New York.
Still, the ECB has been far less aggressive than the U.S. Federal Reserve in raising rates over the past two years. While the Fed raised rates 17 times beginning in June 2004 before pausing earlier this year at 5.25 percent, the ECB held steady at 2 percent from June 2003 until it started raising rates in December.
The Fed's next meeting is scheduled for Oct. 24-25. Many economists believe it will hold steady again.
With the U.S. economy slowing, the central bank decided in August to interrupt its two-year campaign to boost interest rates to fend off inflation. Policymakers suggested the cooling economy eventually would lessen inflation pressures.
In a speech Wednesday, Fed Chairman Ben Bernanke estimated that slowing housing construction will probably take about a percentage point off U.S. growth in the second half of this year and probably something going into next year.
"Yet he also echoed (Fed Vice Chairman Donald) Kohn's concerns on inflation, saying 'inflation is above what we would consider price stability,'" said analyst Stuart Scrase of CMC Markets.
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AP Business Writer Matt Moore reported for this story from Stockholm, Sweden.
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On the Net:
http://www.ecb.int


Updated : 2020-12-05 16:56 GMT+08:00