MercoPress. South Atlantic News Agency

Euro basic interest rate hiked to 4% and further rises hinted

ECB President Jean-Claude Trichet

The European Central Bank raised its key interest rate by 25 points to 4% Wednesday and hinted that further hikes could come to tame inflation in a dynamic euro-zone economy.

In the eighth increase in 18 months matching the vigor euro-zone growth, the European Central Bank lifted its benchmark refinancing rate by a quarter of a point to 4%, the highest reading for five and a half years. ECB President Jean-Claude Trichet said the bank's monetary policy remained on "the accommodative side," adding that Wednesday's move was to counter inflationary risks expected to ease in the near term before rising significantly later in the year. Wages were rising faster than the bank had expected, he said. The bank revised upwards its 2007 inflation forecast in the 13-nation euro zone to 2% from 1.8% previously but held its prediction for next year at 2%, roughly consistent with its preferred level. The bank has set itself an upper target limit for inflation of 2% because experience has shown that beyond this level, people anticipate price rises, thereby adding to inflationary pressures. "After today's increase, given the positive economic environment in the euro area, our monetary policy is still on the accommodative side, with overall financing conditions favorable, money and credit growth vigorous, and liquidity in the euro area ample," Trichet told a news conference. A reference to an "accommodative" stance is seen as a signal that more rate rises could be approved in coming months but not necessarily at the next meeting of the bank's policy-making body. Trichet said the bank was making no pre-commitment on future rate moves but also stressed that it would do whatever was needed to control inflation. "The (ECB's) governing council will monitor closely all developments to ensure that risks to price stability over the medium term do not materialize," he said. Trichet also raised the euro-zone growth forecast for this year to 2.6% from 2.5% and lowered its prediction for 2008 to 2.3% from 2.4%. The head of the German central bank, Axel Weber, who sits on the ECB's governing council, left no doubt in a recent interview that further rate rises were likely. "The current cycle of interest rate hikes has not reached its end," he told the Financial Times. "What is pretty clear is that we are in a stronger than previously expected recovery," he said. "If necessary we will also have to move into a territory that is portrayed as being restrictive, if that is needed to control inflation." "The euro area economy is moving from recovery to upswing," the International Monetary Fund said in a report on Tuesday, which anticipated euro-zone growth of 2.5% percent this year as well as sustained momentum in 2008. The European Union's executive commission predicts a pace of 2.6% this year, while the OECD in Paris sees euro-zone expansion of 2.7%.