Jul 3, 2008, 11:52 GMT
Frankfurt - The European Central Bank (ECB) delivered its first rate hike in about a year Thursday amid growing fears about spiralling inflation and surging oil prices.
The ECB's 21-member rate-setting council defied increasing political opposition to a tighter monetary policy in the 15-member eurozone by raising its benchmark refinancing rate by 25 basis points to 4.25 per cent.
But while analysts had expected the rate increase, they are more divided as to whether it will represent a one-off attempt by the ECB to ward off inflationary pressure or set the stage for further increases.
As a result, with the rate hike considered a done deal, the focus of financial markets will again be on ECB chief Jean-Claude Trichet's press briefing for indications as to the bank's future plans.
However, ahead of the ECB announcement, oil prices bounded ahead by more than 1 per cent to breach the 145 dollars-a-barrel mark to hit a new all-time high with soaring food and energy prices having sparked a global pickup in inflation.
This in turn has raised concerns that central banks around the world will be forced to raise borrowing costs just as international economic growth is losing momentum.
The ECB rate hike and the growing global economic uncertainty also comes as part of the buildup to this month's summit in Japan of the Group of Eight leading industrial nations where the troubled state of the world economy could dominate proceedings.
On Thursday Sweden's central bank, the Riksbank announced that it was joining the push to higher rates by lifting its benchmark repo rate by 25 basis points to 4.5 per cent.
This came in the wake of data showing annual inflation in Sweden climbing to 4 per cent in May to hit its highest rate in more than 14 years.
Adding to the growing worries about the economic risks posed by inflation, figures released on Thursday showed consumer prices in Switzerland jumping to a 15-year high of 2.9 per cent in June, consequently increasing the pressure on the Swiss National Bank.
Eurozone inflation also shot up to a 16-year high of 4 per cent in June, preliminary data announced this week showed. Inflation in the currency bloc is now double the ECB's target of 'close to, but just below 2 per cent.'
Trichet surprised markets last month by signalling that a rate hike could be in the pipeline telling his regularly press briefing that the bank's governing council was in a state of 'heightened alertness' about the risks posed by inflation.
In the meantime, ECB figures released last week pointed to a sustained rise in the amount of money in circulation in the eurozone with the so-called M3 money supply chalking up a 10.5-per-cent annual rate in May. The ECB sees M3 as an indicator of future price trends.
However, coming amid signs that the eurozone economy was slowing European leaders including French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and German Finance Minister Peer Steinbrueck have warned the ECB to tread carefully as it sizes up interest rate policy.
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