ECB raises interest rates despite pressure from EU capitals

ELITSA VUCHEVA

03.07.2008 @ 17:42 CET

EUOBSERVER / BRUSSELS – The European Central Bank (ECB) on Thursday (3 July) raised its key interest rate - from 4 to 4.25 percent - for the first time in more than a year in response to soaring inflation in the euro area.

The ECB's chief, Jean-Claude Trichet, said the bank's decision was motivated by its assessment of the ever increasing risk to price stability in the past few months.

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"Against this background, it is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability," he told a press conference in Frankfurt.

Earlier this week, EU figures showed that consumer prices in the 15 countries using the euro had climbed to four percent in June – which is twice the rate of the ECB's inflation goal of "below, but close" to two percent.

These inflations rates are also the highest since 1999.

"Inflation is now the number one concern of our fellow citizens. There are 320 million of them [in the eurozone] and they are counting on us to be the anchor of price stability," the bank's chief said.

Today's ECB announcement was widely expected n the wake of the eurozone's inflation levels and comments from Mr Trichet last month indicating that he might raise interest rates in July.

However, it did not come without pressure from several member states, who have called on the bank to keep the rates unchanged.

Political pressure

French President Nicolas Sarkozy – who has repeatedly criticised the ECB's monetary policy – on Monday said that raising the rates would not bring inflation levels down, as argued by Mr Trichet.

"The ECB … should ask itself some questions about economic growth in Europe and not just inflation," he said on national television.

"Inflation today is due to the boom in [prices of] raw materials. You can't tell me that in order to fight inflation you have to raise interest rates," he added.

Germany and Spain also sent similar warnings, worrying that the move could reinforce the expected downturn in the euro area's economy.

"The ECB should take into account the consequences of an interest rate hike," German finance minister Peer Steinbruck said on Tuesday (1 July), while Spain's premier, Jose Luis Zapatero, called for "flexibility" in the ECB's policy.

In response, Mr Trichet said: "Everybody knows that we are an independent institution. Our credibility relies entirely on the fact that we are making our judgement on the basis of all the information we have."

He also declined to give indications on the possibilities of a further increase of the bank's interest rates.

"I have no bias. And we are never pre-committed. As you know, this is a constant feature of our monetary policy and we do what is necessary to deliver price stability in the medium term," he said.