MercoPress. South Atlantic News Agency

Euro zone hikes basic rate to 4.25%; oil at new record

The European Central Bank hiked on Thursday its key rate 25 points to 4.25%. This is the first rise in a year and is geared to contain food and fuel prices that in June reached an annualized 4%, the highest since 1996.

The move comes despite concerns that the Euro-zone economy is slowing. In his comments following the official announcement, ECB president Jean-Claude Trichet said that inflation rates have continued to rise significantly since autumn last year and "are expected to remain well above the level consistent with price stability for a more protracted period than previously thought". He added that "continued very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions, confirm our assessment of upside risks to price stability over the medium term". Even when expecting the increase, markets reacted positively since Mr. Trichet was seen to go out of his way in insisting that the decision was not the first of a series of possible future hikes. "On the basis of our current assessment, the monetary policy stance following today's decision will contribute to achieving our objective", said Trichet. This will help "preserve purchasing power in the medium term and continue to support sustainable growth and employment in the Euro area". Previously he had stated that while the latest data confirms the expected weakening of Euro zone real GDP growth in mid-2008, after exceptionally strong growth in the first quarter, "the economic fundamentals of the Euro area are sound". Trichet emphasized that the ECB mandate is maintaining price stability in the medium term and that it is "our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability". But there are growing concerns among leaders and some economists that higher interest rates could cause the economy to slow further. Figures released earlier on Thursday showed that the service sector of the Euro zone economy, which ranges from banks to hotels, had failed to expand for the first time since June 2003. The Euro zone Purchasing Managers Index fell to 49.1 in June, compared to 58.3 in the same month in 2007. A measure below 50 indicates the sector is contracting. Furthermore the slowdown in Spain's service sector was particularly marked, leading some to suggest that Spain is heading for a recession. The rise in Euro zone interest rates had been expected to push oil prices higher. Oil prices hit record levels on Thursday in anticipation of the rate rise, with Brent crude topping 146 US dollars a barrel for the first time. Meanwhile, the dollar had sunk to a two-month low against the Euro though later made ground.