2ND ECB delivers sixth rate rise in 12 months

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dpa German Press Agency
Published: Thursday December 7, 2006

Frankfurt- The European Central Bank delivered its sixth rise in borrowing costs in 12 months Thursday, raising its economic growth forecasts and cutting its inflation projections, but signalling a more cautious approach to further rate increases. The widely predicted 25-basis points rate increase lifted the ECB's benchmark refinancing rate to 3.50 per cent, the highest level for official rates in the 12-member eurozone since 2001.

But speaking at a press conference following Thursday's meeting of the bank's 18-head governing council, ECB chief Jean-Claude Trichet described eurozone interest rates even after the 25-basis points rise as "low" and insisted that monetary policy continued to be accommodative.

While he warned about the threat posed by signs of a renewed wage push in the eurozone and the recent surge in the euro, Trichet stepped back from the hardline rhetoric on monetary policy that has characterised his recent regular monthly press briefings.

Instead of indicating that a further withdrawal of monetary policy might be warranted, Trichet said that the bank was "constantly alert" to the inflationary and economic risks facing the eurozone.

"As always, we reserve the right at any time (to change rates)," Trichet told reporters. "We do not pre-commit," the 63-year-old ECB chief said, adding that the bank was also concerned about the economic uncertainties which might arise in the wake of next year's tax increases in Italy and Germany.

Thursday's increase means that interest rates in the economy built around the euro have risen by 150 basis points since the ECB launched its push a year ago to tighten monetary policy.

Some analysts believe that the ECB is sizing up the prospects for another rate rise in early 2007 with the bank possibly lifting borrowing costs by a further 25 basis points early in the year.

In his comments to reporters, Trichet painted an upbeat outlook for the eurozone's economy saying that the currency bloc was enjoying "robust economic activity" and could look forward to continued solid growth in the fourth quarter.

He said that investment was dynamic and private consumption was strengthening with falling oil prices helping to underpin global demand for the eurozone's exports.

He released Thursday ECB's staff projections showing growth in the eurozone coming in at about 2.7 per cent this year. Growth should then dip back to 2.2 per cent in 2007, before picking up to 2.3 per cent in 2008.

This compared to ECB staff growth forecasts unveiled in August showing the eurozone growing at about 2.5 per cent this year and 2.1 per cent in 2007.

According to the staff projections inflation should top the ECB's target of an inflation rate "close to but below" 2.0 per cent this year and in 2007.

But a fall in oil prices has helped the ECB to lower its previous forecast set out in August for an inflation rate of about 2.4 per cent this year and next.

Now the ECB staff are predicting an inflation rate of about 2.2 per cent this year and 2.0 per cent next year. Inflation should retreat below 2.0 per cent and to 1.9 per cent in 2008.

But Thursday's meeting of the ECB's rate-setting council also came against the backdrop of a sharp rise in the euro and moves in Germany for a pay increase after a protracted period of stagnating wages in the eurozone's biggest economy.

Trichet's told reporters that a fresh round of wage increases could a "temptation which in our eyes, were not appropriate," especially in the light of high unemployment and labour productivity levels.

The euro has zoomed up by about 4.0 per cent against the dollar in the last four weeks to trade at a 21-month high, hovering around 1.33 dollars following the bank's announcement.

But the ECB chief told the press conference that "excessive volatility" in the foreign exchange market was "undesirable."

© 2006 dpa German Press Agency