ECB raises Interest Rates 25 point, cuts 2007 growth forecast.
The ECB considered raising its key interest rates by half a percentage point at its meeting, but the “overwhelming majority” of the bank’s governing council deemed a quarter-point hike more appropriate, president Jean-Claude Trichet said on Thursday.
“The overwhelming majority of the governing council thought that a 25-basis point increase was appropriate,” Trichet told a news conference here. “But we did weigh the assets and liabilities of a 50-basis point rise.”
And European Central Bank chief Trichet said that additional rate hikes were on the cards in the future if the euro zone recovery continued to gather momentum.
“If our (recovery) scenario is confirmed, then further withdrawal of monetary accommodation is warranted,” Trichet said.
The ECB has notched up its benchmark “refi” refinancing rate three times since December, each time by 0.25 percent. With the latest move on Thursday, the refi rate now stands at 2.75 percent.
The European Central Bank has also amended its forecasts for growth and inflation in the 12-country eurozone this year and next year, warning that high oil prices would push up inflation and put the brakes on growth.
And the changing outlook for price stability and for economic growth in the single currency region played a role in the ECB’s decision to raise its key interest rates by a quarter of a percentage point to 2.75 percent on Thursday, ECB President Jean-Claude Trichet said.
Trichet told a news conference here that the guardian of the euro was raising its inflation forecast for 2006 to 2.3 percent from 2.2 percent previously.
At the same time, the bank upheld its 2007 inflation forecast at 2.2 percent.
The ECB defines price stability as annual inflation rates of close to but just below 2.0 percent.
As for the growth outlook, euro-area gross domestic product (GDP) was expected to expand by 2.1 percent this year, the same rate of change as the bank had previously been forecasting, Trichet said.
However, growth would slow noticeably to 1.8 percent next year, compared with a previous forecast of 2.0 percent.
The downward revision of the 2007 growth forecast was a result of the anticipated negative economic effects of high oil prices, the Frenchman said.
Nevertheless, the conditions “remain in place for growth in the euro area to remain close to its trend potential rate, despite the impact of the rise in oil prices,” Trichet said.
According to the latest consumer price data, area-wide inflation stood at 2.5 percent in May, up from 2.4 percent in April.
And the annual rate of inflation was likely to remain above the ECB’s 2.0-percent ceiling for some to come, largely as a result of high energy prices, Trichet said.
“In the months to come and in 2007, inflation rates are likely to remain above 2.0 percent, the precise levels depending on future energy price developments,” Trichet said.
“In the view of the governing council, risks to the outlook for price developments remain on the upside,” Trichet said.
The high level of liquidity in the eurozone economy, as measured by money supply data, was also a source of concern, the ECB chief said.
Strong money supply growth “confirms the stimulative impact of the low level of interest rates remains the dominant factor behind the current high trend rate of monetary expansion,” Trichet said.
“Monetary developments therefore require careful monitoring, in particular in the light of strong dynamics in housing markets.”
SOURCE: AFP
