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Thursday, November 4, 1999 Published at 13:09 GMT


Business: The Economy

Euro-zone rate rise

The European Central Bank sets rates across most of Europe

The European Central Bank has raised its key refinancing rate by a half-point to 3.0%.

It is the ECB's first rate increase since the euro was launched on 1 January.

The change - which takes effect from 10 November - was in line with expectations, as inflationary pressures have been starting to build in the 11 euro-zone countries.

Economists had been debating by how much the ECB would raise rates, rather than whether it would, with most seeing a 0.5% rise most likely.

ECB president Wim Duisenberg said that the Bank raised rates because inflatonary pressures were re-emerging.

"Since the beginning of the summer the balance of risk to price stability has been moving to the upside," he said at a press conference.

Mr Duisenberg addeed that "inflation rates are expected to increase gradually in the months ahead" mainly due to increases in oil prices "working down to consumer prices."

He said raising rates now would "avoid the need for a higher rise in interest rates later," but he could not rule out the need for more rate increases in the future.

Restoring the cut

The move brings rates back to the level they were at in April, when the ECB made its first cut to help stimulate the then weak European economies.

The euro briefly jumped more than a quarter of a cent against the dollar after the announcement but lost the gains within minutes.

The ECB also raised its deposit lending rate to 2.0% from 1.50% and its marginal lending rate to 4.0% from 3.50%.

These increases followed a quarter-point base rate rise in the UK, to 5.5%, announced at midday on Thursday.

Traders are expecting European interest rates to reach 4% by the end of next year.

Setting euro-zone rates

The ECB has sole responsibility for monetary policy in the 11 euro-zone countries from the 15-nation European Union. One of its primary duties is to bear down on inflation.

The bank's governing council had debated a rate rise three weeks ago, but decided to await more data to back up fears of an inflation risk.

ECB president Wim Duisenberg said then that the bank was prepared to raise rates once it saw further evidence of a strengthening European economy. He confirmed that the increase in producer prices across Europe was the strongest reason for their concern.

Ottmar Issing, the bank's chief economist, fuelled further talk of a rate rise on Friday when he said new data confirmed the growth trend.

"Everything is showing in the direction of stronger activity," he said.

Endangering the recovery

Mr Duisenberg has argued that a rate rise wouldn't impede economic growth and efforts to bring down Europe's chronically high unemployment. He says that changes in Europe's rigid labour markets are the main reason for high unemployment.

But others said that a rate rise would endanger the recovery under way, especially in Europe's biggest economy, Germany, where growth has trailed the rest of the euro-zone.

Economists in some of the smaller countries, however, which are already growing quite fast, worried for the opposite reason - that the interest rate rise was coming too late and would not slow their over-heated economies.

"It's really it's too little too late for the Netherlands. Inflation is already way above the ECB's target," said Aline Schuiling, economist at MeesPierson in Amsterdam.

And in Spain, where inflationary pressures are also growing, economists were also sceptical.

"Higher interest rates will help put the brakes on consumption which is very high in Spain," said Xavier Segura, head of research at savings bank Caja de Catalunya in Barcelona.

"But half a percentage point is not a particularly strong measure," he added.

The divergence between the performance of different European economies is one of the main reasons cited by Eurosceptics for not having a uniform interest rate across Europe.





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