Brussels, 03/08/2006 (Agence Europe) - On Thursday, the European Central Bank (ECB) increased the key ECB interest rates by 25 basis points, taking the minimum level for the main refinancing operations to 3%, the marginal lending facility interest level to 4% and that of the deposit facility to 2%. These changes will become effective from 9 August. Announcing its intention last month to break with its summer tradition of not having a meeting of the Governing Council (but having teleconferences instead) or a press conference, the ECB prepared the way for a communication on a rates increase. The decision of 3 August does not come as a surprise, even though it comes two months after the previous rise, when, until now, the ECB has tightened its policy every three months (in December 2005, March 2006 and June 2006). An acceleration in rhythm, then, but no change in the size of the increase, which remains at 25 basis points, as Jean-Claude Trichet had suggested in July (see EUROPE 9227).
While some economists feel the ECB should opt for two-monthly monetary tightening, Mr Trichet has obviously not confirmed such a timetable. On Thursday he once again pointed out to press that the Governing Council does not work to a predetermined schedule. “It has been absolutely clear since the start of our first change in December that we do not decide in advance,” said Mr Trichet, adding that they do not feel themselves committed to any pre-set cadence, whether of two or three months for example. Similarly, looking only at the current decision, he said that the 25 basis point-rise had been “overwhelmingly supported” by the 18 members of the Governing Council.
“Given that our monetary policy continued to be accommodative, a progressive withdrawal of monetary accommodation will be warranted if our assumptions and baseline scenario are confirmed,” said Mr Trichet after the meeting. Inflationary risks are on the increase, he said, giving his assurances that the ECB would continue to keep a close eye on price stability.
During the first quarter of 2006, economic growth stood at 0.6% of GDP and economic activities are increasingly based on domestic demand, Mr Trichet pointed out, saying recent indicators confirm that “economic growth has continued at a sustained pace”. Although recovery conditions are still in place, risks remain the same relating in particular to the “potential for further oil price rises, a disorderly unwinding of global imbalances and protectionist measures, especially after the suspension of the Doha Round of trade talks”, he noted. Mr Trichet then went on to conclude that, in the longer term, conditions have been met so that economic growth in the euro zone continues at rates close to its potential.
Unchanged compared to May and June, the rate of inflation was 2.5% in July 2006, showing that the ECB was right to be especially vigilant, and, given future risks, the new rise in rates is justified. “Indirect effects of past oil price increases and already announced changes in indirect taxes are expected to exert a significant upward effect on inflation in the course of next year”, Mr Trichet commented. “The key ECB interest rates remain low in both real and nominal terms, money and credit growth remain strong, and liquidity in the euro area is ample by all plausible means”, he added, stressing that, in the medium term, risks for price stability prevail. During the second half of 2006 and in 2007, therefore, inflation rates should, on average, be above 2%, their exact level depending on future movements of energy prices. “Given strong monetary and credit growth in a context of ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that upside risks to price stability prevail over the medium term”, was Mr Trichet's final note of warning.