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European Central Bank raises key interest rate

The European Central Bank (ECB) raised its key interest rate on Thursday by a quarter of a percentage point to 2.25 percent, its first rate hike in five years.
/ Source: The Associated Press

The European Central Bank (ECB) raised its key interest rate on Thursday by a quarter of a percentage point to 2.25 percent, its first rate hike in five years.

The move had been widely expected although some economists had questioned it.

But ECB President Jean-Claude Trichet told a news conference the increase would keep inflation in check and would not hurt growth in the 12-nation zone where the euro is the shared currency.

The bank, which controls monetary policy in the euro zone, had sent signals over the past two weeks that its refinancing rate would be increased, likely to 2.25 percent from the 2 percent where it had been since June 2003.

The last time the bank raised its interest rate was Oct. 6, 2000, when it increased the rate from 4.5 percent to 4.75 percent. It subsequently lowered the rate until it reached 2 percent in June 2003. That was the last time the European bank adjusted its rates.

Trichet said Thursday the central bank expects gross domestic product growth ranging from 1.2 percent to 1.6 percent for the rest of 2005.

In 2006, he said the bank saw GDP growth at 1.4 percent to 2.4 percent, up from the 1.3 percent to 2.3 percent forecast in September. For 2007, GDP growth was expected to range from 1.4 percent to 2.4 percent.

“Today’s decision will contribute to keeping medium- and long-term inflation expectations in line with price stability,” he said.

The euro fell against the U.S. dollar after the announcement, trading at $1.1715 versus $1.1791 late Wednesday in New York.

Trichet had said recently the bank’s governing council was prepared to “moderately augment” interest rates. His hints about an increase had initially cheered analysts and economists, many of whom fidgeted as the ECB held steady over the past two years while the Federal Reserve raised its rates 12 times to 4 percent in the same period.

But some have questioned whether now was the right time.

French Prime Minister Dominique de Villepin said Thursday that he wanted “nothing to be done that would undermine growth in Europe.”

The Organization for Economic Cooperation and Development said this week that the euro-zone economy was too weak — and inflation too low — to merit a rate increase.

The OECD credited the euro zone recovery so far in part to low interest rates, a dropping euro and robust export markets. But the recovery is not complete and domestic demand is stagnant, so “rates should remain unchanged until the recovery is locked in,” the OECD said.

But after the rate hike, Trichet dismissed the idea that the calls by politicians and others to hold back on a rate increase had any effect, and said all 18 members of the governing council favored a raise.

“We have a duty which is not to be influenced,” he said. “My colleagues, myself, the vice president and the 16 others on the governing council, we look at absolutely everything. We know we have a mandate.”

He said, “311 million people are expecting us to deliver price stability. Their message is very clear: They are asking us to be up to our mandate.”

EU inflation rose to 2.6 percent in September versus a year ago from 2.2 percent year-to-year growth in August as oil prices surged. The ECB’s inflation guideline is just below 2 percent.