ECB hints that rates rise will not be the first of many

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The Independent Online

The European Central Bank raised interest rates for the first time in five years yesterday but hinted it was not about to rush into a series of rapid further increases.

The quarter-point increase to 2.25 per cent had been well signalled to the financial markets by Jean-Claude Trichet, the bank's president. He said yesterday the bank was still concerned about the inflation outlook. Risks to price stability were on the upside and had even increased from some quarters, he said.

M. Trichet signalled that the move was not necessarily the first of many, saying the governing council had not decided whether to move again.

"We are not engaging in a series of interest rate increases, and we will continue to monitor closely all development with respect to price stability," he said.

M. Trichet revealed that some members of the 18-strong council had wanted an increase of a half-point while others had wanted interest rates to stay on hold - although the final decision was "unanimous".

His comments came as cold comfort to European politicians and business leaders who had urged the ECB to keep its base rate at a historic low. Peer Steinbrück, the German finance minister, said: "I don't believe it will have any big negative impact ... as long as it does not lead to further steps. I will be talking to the ECB about this."

M. Trichet left the door open to further interest rate increases, saying that the bank was monitoring the data closely, but indicated that any fresh rises would be well signalled.

"We were very proud to be one of the most predictable central banks and we will continue to be predictable," he said.

The ECB also published new forecasts that showed a higher profile for growth and inflation. It raised the inflation outlook for 2006 to a 1.6-2.6 per cent range, giving a mid-point of 2.1 per cent, compared with a 1.4-2.4 per cent range with a mid point of 1.9 per cent in September.

"The ECB's own forecasts seem to imply that rates will have to rise again in order to bring inflation back within target," said Julian Jessop, the chief international economist at Capital Economics, who expects rates to hit 3.5 per cent by the end of next year.

But Joerg Kraemer, the chief economist at HVB bank in Frankfurt, said that rates would increase only once more between now and the end of next year to take it to 2.5 per cent.

"Economic growth slows down after the turn of the year [and] this will strengthen the hand of those on the council who are against higher rates anyway," Mr Kraemer said.

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