MercoPress. South Atlantic News Agency

ECB ups basic rate to 3.25%, highest in five years

The European Central Bank increased on Thursday the basic interest rate of the Euro zone by 25 points to 3.25%, the highest in five years. This was the fifth time rates have been increased since last December.

ECB president Jean Claude Trichet said the decision to increase rates "will contribute to ensuring that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability"

However, "ECB interest rates remain at low levels, money and credit growth are strong, and liquidity in the euro area is ample by all plausible measures", reflecting ECB monetary policy which continues to be "accommodative".

The ECB Governing Council "will therefore continue to monitor very closely all developments so as to ensure price stability over the medium and longer term".

As to the economic analysis President Trichet said that a significant acceleration in economic expansion has taken place over the past few quarters. "On the basis of the revised data, economic activity has been growing at a quarterly rate of 0.7% on average over the last four quarters, the unemployment rate has been on a falling trend, employment growth has recovered and employment expectations overall have remained favorable" explained the ECB president insisting that "economic recovery now appears somewhat stronger, more broadly based and mainly supported by domestic demand".

Looking ahead to the remainder of 2006 and 2007, "conditions remain in place for the euro area economy to grow at solid rates around potential, with some volatility in the quarterly growth rates likely to emerge around the turn of the year".

Further on Trichet said that risks to the outlook for economic growth are broadly balanced over the shorter term, although the recent fall in oil prices, if it were to prove lasting, has the potential to lead to somewhat stronger demand and output growth than embodied in our baseline scenario for activity in the coming quarters".

However over the longer term, risks to growth lie on balance on the downside, and relate mainly to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures, especially after the suspension of the Doha round of trade talks, and possible disorderly developments owing to global imbalances.

Regarding risks to the outlook for price developments, "they remain clearly on the upside" in spite of the fact that annual inflation fell to 1.8% in September 2006 compared to 2.3% in August. While the outlook for energy prices is uncertain, on the basis of current energy prices and the higher quotations on futures markets, overall inflation rates are likely to increase again towards the end of the year and in early 2007.

As a consequence, "we expect a considerable degree of short-term volatility in the annual inflation rate, while the overall inflation rate will remain elevated at levels above 2% on average in 2006 and is likely to remain so in 2007".