Jul 3, 2008, 14:15 GMT
Frankfurt - The European Central Bank (ECB) delivered its first rate hike in more than a year Thursday but signalled the 25- basis points rise should be sufficient to ward off renewed inflationary pressures.
Faced with a jump in inflation and surging oil prices, the ECB defied increasing political opposition to a tighter monetary policy in the 15-member eurozone by raising its benchmark refinancing rate 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 head 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 21-member governing council had 'no bias' on further interest rate moves.
'Starting from here, I have no bias,' Trichet told reporters. 'We have no pre-commitment. We do what is necessary to ensure price stability.'
His comments helped to give fresh impetus to European stocks but to undercut the euro, which had been steadily rising in the run up to Thursday's ECB meeting.
While the ECB chief said Thursday's 'monetary stance will contribute to price stability', he warned again about the threat posed by surging inflation saying the eurozone was facing 'a protracted period' of 'persistent' inflation.
But Trichet also went on to play down worries that the global economy was sliding into a bout of 1970's stagflation.
'Growth is there,' he said. 'We have inflation, but we don't have stagflation.'
He also expressed confidence that continued robust growth from the world's emerging economies would help to shore up world economic growth, despite the uncertainty surrounding the current 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.
Thursday's decision to raise borrowing costs, Trichet said was 'to prevent broadly based second-round effects' as a result of rising inflation feeding through to a push for higher wages.
At 4 per cent, eurozone inflation now stands at double the ECB's target of 'close to, but just below 2 per cent' with soaring food and energy costs having sparked a global pickup in inflation.
Moreover, signs of the continued inflationary pressures emerged Thursday with oil prices bounding ahead by more than 1 per cent to hit a new all-time high above the 145 dollars-a-barrel mark.
This in turn has raised concerns that central banks around the world will be forced to raise borrowing costs to stem inflation just as international economic growth is losing momentum.
The ECB rate hike and the more uncertain global economic picture 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.
At his press conference Thursday, Trichet also pointed to what he described as very vigorous money and credit growth.
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 also 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 future interest rate policy.
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