Jul 3, 2008, 13:04 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.
While analysts had considered Thursday's rate increase a done deal, they have been 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.
But ECB chief Jean-Claude Trichet told at a press conference that the bank's governing council had 'no bias' on the direction of interest rates and insisted it made 'no pre-commitments.'
He said Thursday's 'monetary stance will contribute to price stability'.
The decision to raise borrowing costs, Trichet said was 'to prevent broadly based second-round effects' which essentially means rising inflation feeding through to a push for higher wages.
But the ECB chief warned that the eurozone was facing 'a protracted period' of inflation which was likely to be more 'persistent' than previously thought.
He also went on to express concern about the prospects of slowing growth, saying the eurozone faced 'an uncertain economic outlook.'
The ECB last raised rates in June 2007, but was forced to abandoned a planned hike in September in the face of the financial market turmoil triggered by the US subprime mortgage sector crisis.
At 4 per cent, eurozone inflation now stands at double the ECB's target of 'close to, but just below 2 per cent.
Oil prices bounded ahead by more than 1 per cent Thursday to hit a new all-time high above the 145 dollars-a-barrel mark with soaring food and energy costs 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 to stem inflationary pressures just as international economic growth is losing momentum.
The ECB rate hike and the growing global economic uncertainty also came as part of the buildup to next week'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.
The Riksbank move 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 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.
Preliminary data published this week showed Eurozone inflation at a 16-year high of 4 per cent in June.
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.
At his press conference, Trichet described the money supply as vigorous.
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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