Brussels, 03/07/2008 (Agence Europe) - As the President of the European Central Bank (ECB), Jean-Claude Trichet, hinted at end of the last ECB Governing Council meeting in June 2008 (see EUROPE 9676), the ECB decided on Thursday 3 July to increase its interest rates by 25 base points (0.25 percent). The minimum bid rate for the main refinancing operations has therefore gone up to 4.25% and the marginal loans facility and deposit facility have increased to 5.25% and 3.25% respectively. The decisions will take effect on 9 July 2008. At a press conference, Trichet explained that the Governing Council's decision had been unanimous with the aim of avoiding second round effects on a broad basis and to counter the mid-term price stability risks. He explained that faced with a period of high inflation that would last longer than predicted only a few months ago, the current trend in monetary policy would help the ECB meet its objective of price stability, adding that no further increases would be made in the immediate future.
Trichet said that the ECB's main aim was ensuring mid-term price stability, and stressed the bank's strong determination to keep inflation forecasts firmly anchored to its definition of price stability (around 2%). Inflation has been well above that since the autumn of last year. At 4%, annual inflation reached a record high in the eurozone in June 2008 (after 3.7% in May 2008) and is expected to remain well above 2% for a while before falling slightly in 2009. Trichet said this worrying level of inflation resulted above all from the hikes in oil and food prices globally over recent months. He said he would continue to monitor future changes very closely. The eurozone's economic fundamentals remain 'healthy' he said, and 'sustained economic growth' should continue. After a good first quarter, growth would, however, be rather low in the second quarter of the year, he said, brushing aside risk of stagflation (a recession combined with rising prices). Noting that the ECB had not committed itself to anything in advance, Trichet suggested that the interest rate rise he had just announced might suffice, commenting that he was no longer committed either way. This message helped raise spirits slightly on stock exchanges and bourses, which had been fearing a more definite announcement of a series of rate rises. This does not seem to be on the cards for the moment.
Although a one-off rate rise, many commentators have expressed concern about the increase announced on Thursday, seeing it as contributing to a slowing down of the economy. The European Trade Union Confederation (ETUC) described it as 'incomprehensible', saying that the ECB's decision was dangerous, counter-productive and unnecessary. In a press release published after the ECB's meeting in Frankfurt, the ETUC said the rate rise would stifle the eurozone's economy and not contribute to tackling the real causes of inflation in that it is essentially imported from the rest of the world through the high oil prices. ETUC Deputy Secretary General Reiner Hoffmann said the price-salary inflationary spirals would not take place, being a thing of the past and the it was time the ECB realised that we were no longer living in the 1970s. More cautiously, the UEAPME (EU craft and SME union) also argued that an interest rate rise was not the right way to deal with the current inflationary situation. UEAPME economic and budgetary policy director Gerhard Huemer said it was the wrong weapon but the right target, and risked putting disproportionate pressure on the real economy, sending a worrying signal to companies in the eurozone. He hoped it was not the first in a string of interest rate rises. (A.B.)