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Last Updated: Thursday, 1 December 2005, 14:22 GMT
ECB ignores fears to raise rates
ECB President Jean-Claude Trichet
The ECB's Mr Trichet is worried that prices are on the way up
The European Central Bank (ECB) has ignored warnings about an economic slowdown and raised interest rates.

It is the first time the ECB has changed rates since June 2003 and the first time they have risen since 2000.

Looking to control inflation, the ECB lifted its key rate by a quarter of a percentage point to 2.25%.

Critics argued that higher borrowing costs could cause a slowdown in growth and pointed to the mixed economic picture in key eurozone members.

Getting stronger

ECB president Jean-Claude Trichet countered these arguments by saying that recent data showed economic growth had strengthened in the eurozone during the second half of this year.

Even with the quarter percentage point increase, Mr Trichet said that interest rates were accommodative and consistent with anchoring inflation expectations.

He added that the eurozone economy would be underpinned by improving global demand for exports, stronger consumer spending and wage growth, and domestic investment by companies.

To push his point home, Mr Trichet said that the ECB expected eurozone economic growth of between 1.2% and 1.6% this year, and between 1.4% and 2.4% in 2006.

Price growth

However, inflation remains a problem and the ECB revised upwards its consumer price growth forecast for 2006 to 2.1%, above its 2% limit.

It also is forecasting a rise in core price growth.

The economic environment does look a bit better, but we are still in the early stages of an economic recovery
Rainer Guntermann, DKW

"We are expected by 311 million people to provide price stability," Mr Trichet said, and went on to underline that the best way to ensure low interest rates is to control price growth.

He also pointed out that economic growth and job creation would be best served by steady price growth.

Mr Trichet hinted that rates may not need to rise too much further, should price pressures not increase, and that the bank was not embarking on a series of increases.

"The one thing which I think is interesting is that the 'strong vigilance' wording has been dropped, which clearly suggests once again that they are not planning to hike again any time soon," said Stephane Deo, an economist at UBS.

Reaction

The euro fell against the dollar on the news, sliding to $1.1726 from about $1.1751 in afternoon trading.

Among those questioning the wisdom of such a rate hike was the Organisation for Economic Co-operation and Development (OECD).

The OECD said any increase in borrowing costs should come in the middle of next year, so that the eurozone's economic recovery could take a stronger hold.

"The economic environment does look a bit better, but we are still in the early stages of an economic recovery," said Rainer Guntermann, an analyst at DKW.

Mr Guntermann added that the ECB was likely to "face public criticism for taking this step".





SEE ALSO:
Q&A: ECB interest rate rise
01 Dec 05 |  Business
Eurozone rates set for increase
01 Dec 05 |  Business
OECD warns on eurozone rate rise
29 Nov 05 |  Business
Trichet re-affirms ECB rate rise
21 Nov 05 |  Business
German growth boosted by exports
15 Nov 05 |  Business
ECB keeps interest rates on hold
06 Oct 05 |  Business


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