Trying to curb inflation, the European Central Bank has raised interest rates for the first time in more than a year, by a quarter percentage-point 4.25%. The ECB acted after euro zone inflation accelerated to 4% year-on-year last month, more than double the bank’s target level.
Bank president, Jean-Claude Trichet explained: “We emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and continue to support sustainable growth and employment in the euro area.”
As inflation pressures have increased, the bank has raised the cost of borrowing from 2.25% at the end of 2005 to today’s 4.25%. The ECB is the first G7 central bank to raise interest rates since the credit crisis erupted in August last year though all are facing inflation pressures.
Fast rising energy prices are a major component of the higher inflation. With people paying more for their petrol and other goods, the ECB is moving to head off a so-called wage-price spiral when workers ask for higher pay which then drives prices up further.
Asked if there could be additional rate rise later this year Trichet said “I have no bias.” Investors interpreted that as meaning there would not be more. European leaders have expressed concern that with its inflation fight the ECB could stifle the region’s economic growth.