ECB raises key interest rate

Trichet refuses to commit to further rate rises.

The European Central Bank (ECB) today raised its main lending rate to 1.25% in order to address the risk of higher inflation. This is the first time that the bank has changed the rate since May 2009 and the first increase in the rate since July 2008.

Speaking after a meeting of the ECB’s governing council in Frankfurt today, Jean-Claude Trichet, the ECB’s president, said: “The adjustment of the current, very accommodative, monetary policy stance is warranted in the light of upside risks to price stability.” He said that monetary liquidity was “ample” and could contribute to price pressures.

Asked if the rate increase would penalise weaker members of the eurozone such as Greece, Ireland and Portugal, Trichet said: “We take our decisions taking into account the 17 [members of the eurozone] and the overall GDP of the eurzone.” He added: “It is because we do want to keep the stability we have for 17 countries and 331 million people.”

Trichet said it was “essential” that recent price developments did not give rise to “broad-based inflationary pressures” over the medium term. He said the bank’s decision would help keep inflation expectations “firmly anchored”, in line with the ECB’s aim of keeping inflation below or close to 2% over the medium term. Eurozone inflation rose to 2.6% in March, driven up by higher prices for food and energy.

Trichet said that despite the increase, interest rates remained low and should contribute to economic growth and job creation. He said recent data showed that the “underlying momentum” of economic activity continued to be positive.

Asked whether today’s decision was the first in a series of rate rises, Trichet said that the governing council had decided unanimously to increase the rate but had not decided that it was the first in a series of rises.

But he did not rule out further rate rises, saying: “We always do what is necessary, taking into account delivery of price stability in the medium term.”

Growth prospects

Trichet said the outlook for growth in the eurozone was positive. Eurozone exports should be helped by the ongong recovery in the global economy, he said, while a high level of business confidence and private-sector demand should also contribute to growth. The recovery could, however, be dampened by a process of balance-sheet adjustments in several sectors, he said.

Risks arising from tensions in the financial markets could have a negative effect, Trichet said, while there were also risks from increases in energy prices, especially because of tensions in the Middle East, protectionist measures and a “disorderly correction of global imbalances”.

Trichet spoke about the potential economic impact of the earthquake and tsunami in Japan. He said the disaster, together with uprisings in north Africa and the Middle East, could lead to higher than expected energy price rises while strong economic growth in emerging markets could also lead to increases in commodity prices.

Targets

Trichet said that all governments had to achieve their fiscal consolidation targets for 2011. He urged governments to announce further consolidation measures for 2012 and beyond to help convince the public and the markets that corrective policies would be sustained.

He also called on governments to implement “substantial and far-reaching structural reforms” to strengthen the growth potential, competitiveness and flexibility of the eurozone. He said policies that enhance competition and innovation should be pursued while wage flexibility and extra incentives should be improved in order to get people back to work.

Trichet said that proposals for new economic governance measures “fall far short of the necessary quantum leap in the surveillance of the eurozone needed to ensure its smooth functioning”.

He called on EU member states, the European Parliament and the European Commission to agree “more stringent requirements, more automaticity in the procedures and a clear focus on the most vulnerable countries”.