“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

And a further tightening of monetary conditions is more or less a done deal when the euro bank’s decision-making governing council meets in the Spanish capital on Thursday.
Twice a year, the council holds its monthly rate-setting meeting at a venue outside its headquarters in Frankfurt. This time it is the turn of Madrid.

The question for some ECB watchers is whether the central bank might raise rates by a more aggressive 0.50 percentage point amid concerns about the inflationary effects of runaway oil prices, especially as an economic recovery in the 12 countries that share the euro appears to be gathering pace.

“An interest rate hike on Thursday is pretty much a done deal. The real question is what size the hike will be,” said Capital Economics analyst, Lucy Hartisson Monday.
ECB officials have been meticulously preparing the ground for a tightening of monetary conditions in recent months.

ECB chief Jean-Claude Trichet has been flagging further rate hikes for some time, repeatedly insisting that “strong vigilance” was required on the inflation front.
More recently, Luxembourg central bank chief Yves Mersch was adamant that further tightening was necessary, even if the exact scale and timing of a rate move had not yet been decided.
And last week, the head of the Austrian central bank, Klaus Liebscher, was asked whether a move was imminent and he replied: “I assume so”.

High oil prices were “more of a danger to price stability than to economic growth,” since they make themselves felt a lot faster and to a much greater effect on the cost of living than on economic recovery, Liebscher argued.

Indeed, the latest consumer price data showed a slight acceleration in area-wide inflation to 2.5 percent in May, way above the ECB’s ceiling of 2.0 percent.
Pressures are also building up further up the price pipeline, with money supply data showing a more than ample supply of liquidity in the euro-area economy, and very strong credit growth.
At the same time, an economic recovery appears to be gaining in breadth and depth, the latest data show.

“Data have continued to suggest that the eurozone economy is accelerating into the second quarter,” said Investec analyst, David Page.
Business confidence in Germany, the eurozone’s biggest economy, is close to its highest level in 15 years and consumer demand, traditionally the Achilles’ heel of German recovery, is also emerging from years in the doldrums.

Last week, the Organisation for Economic Cooperation and Development (OECD) upgraded its forecast for eurozone growth this year to 2.2 percent from 2.1 percent previously.
Analysts believe the ECB is also likely to raise its own growth forecasts when it publishes them, also on Thursday. The bank is currently predicting growth of 2.1 percent in 2006 and 2.0 percent in 2007.

However, the current strength of the euro might diminish the need for aggressive rate hikes, since a strong euro tightens monetary conditions in the single currency area by making eurozone goods more expensive to export and keeping a lid on the price of goods imported into the euro area.

“Objectively speaking, the data point more to a quarter-point move,” said Commerzbank economist, Michael Schubert.
Bank of America economist Holger Schmieding agreed.
“We don’t think the ECB will be ready to impose a half-point hike” at this point, he said, arguing that the bank would have flagged a more aggressive hike more clearly in advance.

SOURCE: AFP