Vigilant ECB raises key rates

The European Central Bank raised its key interest rate by a quarter-point to 3.5 per cent yesterday, blaming higher oil prices and the weak euro for fuelling inflationary pressures.

Further rate rises are in the pipeline, analysts said. José Luis Alzola of Salomon Brothers predicted that Euroland interest rates would have to climb to 4.5 per cent by the end of this year, as the falling euro had already offset ECB rate rises in November and February. "Unless, unexpectedly, the euro rebounds significantly very soon, we should expect the ECB to tighten monetary policy again by mid-year," he said. Commentators now expect rates to climb to 5 per cent or more.

The ECB's move came earlier than the markets had expected, and ahead of a likely US interest-rate rise next week.Figures yesterday showing a bigger-than-expected rise in US producer prices increased the likelihood that the US Federal Reserve will act next week. They jumped 1 per cent in February, the sharpest monthly gain in nine years. Higher energy and tobacco prices were the main culprits; core producer prices rose just 0.3 per cent.

The ECB said: "Upside risks to price stability were seen as a reason for vigilance." The euro remained at just above $0.96 after the announcement. Most analysts expect its rate against the dollar to languish at this level or lower until there is evidence of a US slowdown and recovery in Europe.

The ECB raised all three official rates by a quarter-point, taking the headline refinancing rate to 3.5 per cent, the marginal lending rate to 4.5 per cent and the deposit rate to 2.5 per cent.