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ECB hikes rates to 5yr high { March 8 2007 } Original Source Link: (May no longer be active)
http://news.yahoo.com/s/afp/20070308/bs_afp/ecbeurozonebank_070308165911http://news.yahoo.com/s/afp/20070308/bs_afp/ecbeurozonebank_070308165911
ECB hikes rates to five-year high
March 8, 2007
FRANKFURT (AFP) - The European Central Bank shrugged off political pressure and recent jitters on world financial markets to raise its key interest rates to a five-and-a-half-year high on Thursday in a bid to keep a lid on inflation in the 13-country eurozone.
As unanimously predicted, the ECB's rate-setting governing council raised its key interest rates by a quarter of a percentage point to 3.75 percent, bringing eurozone borrowing costs to their highest level since September 2001.
The bank, known as the guardian of the euro, also increased its other two key rates -- the deposit rate and the marginal lending rate -- by 0.25 percentage point to 2.75 percent and 4.75 percent respectively.
The rate rise, the seventh in 15 months, had been widely expected, so that the euro held steady at around 1.3154 dollars immediately after the decision.
Just 45 minutes earlier, the Bank of England had held its key rates steady at 5.25 percent for the second month in a row, sticking to its wait-and-see approach after British annual inflation slowed sharply in February.
Attending the ECB meeting in the bank's Eurotower headquarters in Frankfurt was the EU's commissioner for economic and monetary affairs, Joaquin Almunia, and German Finance Minister Peer Steinbrueck, who represented eurozone finance ministers.
ECB President Jean-Claude Trichet was scheduled to explain the reasoning behind the move at a news conference later on Thursday.
The guardian of the euro had already raised its benchmark "refi" refinancing rate six times in the past 15 months -- in December 2005 and in March, June, August, October and December of last year, each time by a quarter of a percentage point.
But ECB chief Trichet and other top monetary officials had all carefully prepared the ground for another move this month.
Even the heavy sell-off in global stock markets last week is unlikely to be of sufficient concern for the ECB to alter its course of monetary tightening, analysts said.
The German BdB banking federation said the increased level of borrowing costs "fits in well with the current economic situation" in Europe.
"During the course of this year, the euro area will be able to bank on growth of a good 2.0 percent, despite the slight slowdown in the global economy," said BdB president Manfred Weber.
"At that pace of growth, a neutral level of central bank rates -- which we see as 3.5-4.0 percent -- is justified," Weber said.
Nevertheless, any increase in eurozone borrowing costs is expected to raise political hackles in Europe, since politicians are concerned that higher borrowing costs could put the brakes on recovery.
Eurozone finance ministers have painted a positive picture of the inflation outlook, despite the upward price pressures coming from the sharp rise in January in value-added or sales tax (VAT) in Germany, Europe's biggest economy, and high wage demands.
The latest data showed that area-wide inflation was steady at 1.8 percent in February, below the ECB's target of just under 2.0 percent.
But the ECB itself is concerned that oil prices might start to rise again and that high wage demands could trigger an inflationary spiral.
Germany's powerful IG Metall labour union, for example, is to demand wage increases of 6.5 percent for the 3.4 million workers in the German engineering and metal-working industry in wage talks next month.
The German DGB trade union federation said the latest rate rise was "not justifiable."
"There is absolutely no economic justification for the decision," said DGB board member Claus Matecki.
"Neither the inflation expectations nor the frequent concern over unions' allegedly exaggerated wage demands justify the move," Matecki said.
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