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Last Updated: Thursday, 2 March 2006, 14:39 GMT
Q&A: ECB interest rate rise
ECB President Jean-Claude Trichet
Mr Trichet is staying "vigilant" on inflation
The European Central Bank (ECB) raised interest rates in March by a quarter of a percentage point to 2.5% - the second change in rates in four months.

The move came amid fears of rising inflation in the eurozone because of higher oil prices.

ECB president Jean-Claude Trichet has warned that the bank will remain vigilant on inflationary pressures.

BBC News explains the background to the ECB decision and the likely consequences for eurozone consumers.

Why did the ECB decided to raise interest rates?

The bank decided to raise interest rates in response to a strengthening eurozone economy and fears of growing inflation.

When the ECB was set up, there was a good deal of worry about high rates of inflation, and it was given an explicit mandate to keep a low and stable inflation rate.

The ECB defines its target as keeping inflation in the 12 countries of the eurozone under 2%, but for most of last year the inflation rate has been higher than this.

In addition, rate rises in other countries, notably the US, mean that ECB rates have been looking quite low. As a result, many investors have been moving their money into the US, weakening the euro currency against the dollar.

This could add inflationary pressures in the future, especially as oil is priced in dollars, although a cheaper currency also helps European exporters.

How much of a worry is inflation?

There are concerns that inflation is rising in the eurozone, fuelled by rising oil prices.

The ECB revised upward inflation forecasts for 2006 and 2007 to a mid point of 2.2% for each year, compared with 2.1% and 2.0% in its December forecasts.

The growth outlook also was increased to 2.1% halfway through 2006 and 2.0% next year, from 1.9% previously.

What will be the effect on growth in the eurozone?

Many European politicians are worried that the rise in interest rates could choke off a potential European economic recovery after several years of weak growth and high unemployment.

These fears are particularly strong in the eurozone's largest economies: France, Germany and Italy.

One problem is that while there is weak growth in the core eurozone economies, growth and inflation are stronger in more peripheral countries such as Spain.

Will there be further rate rises?

ECB president Jean-Claude Trichet says that the latest decision to raise interest rates was not a sign that future increases had been decided upon.

"We will continue to monitor very closely all developments that will modify our assessments of the risks to price stability," Mr Trichet said following the latest rate rise.

However, financial markets have been convinced that eurozone interest rates will continue to rise, with forward markets pricing in a rise to 2.75% by the end of 2006.

Some commentators believe that rates will go above 3% - which would still leave eurozone rates well below those of the US, which have already reached 4.5%.




SEE ALSO
Euro rates up on inflation fears
02 Mar 06 |  Business
ECB to be 'vigilant' on inflation
02 Feb 06 |  Business
ECB ignores fears to raise rates
01 Dec 05 |  Business
OECD warns on eurozone rate rise
29 Nov 05 |  Business
Trichet not satisfied with growth
03 Oct 05 |  Business
ECB builds hopes for euro economy
05 Aug 05 |  Business

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