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European Central Bank lifts key interest rate

The European Central Bank raised its key interest rate by a quarter percentage point to 2.75 percent Thursday in a move aimed at keeping inflation at bay.
/ Source: The Associated Press

The European Central Bank raised its key interest rate by a quarter percentage point to 2.75 percent Thursday in a move aimed at keeping inflation at bay.

Analysts have said such an increase could help settle the world’s stock markets, which have been volatile since the Federal Reserve Bank head suggested more rate increases could be coming in the United States.

But bank watchers will be waiting to hear if ECB President Jean-Claude Trichet provides any hints about what is ahead for Europe — possibly another increase as soon as July.

Trichet seemed to signal at last month’s meeting that a rate increase was imminent, when he said the bank was being “vigilant” in monitoring inflation risks.

In a survey of 50 economists and analysts by Dow Jones Newswires this week, all but two believed the bank would raise its key refinancing rate by a quarter of a point to 2.75 percent. The other two had forecast a half-point increase to 3 percent.

Holger Schmieding, an economist with Bank of America in London, had said a quarter-point increase in European rates would help settle the world’s stock markets, which were roiled by Fed chief Ben Bernanke’s comments.

Schmieding said such an increase “would probably be greeted with an initial sigh of relief by markets,” including a slight rise in the U.S. dollar against the euro.

Trichet had said this week that the euro-zone economy had improved since 2004.

“One can observe a progressive recovery. We are progressively going up close to our potential; we are around our potential,” he said, but added that he remained “very cautious, very prudent” about the economic outlook.

By the bank’s calculations, inflation exceeded its inflation ceiling in May, rising to 2.5 percent from 2.4 percent in April. The bank’s goal is to keep the rate at close to but less than 2 percent. Money supply, which it uses to gauge the future threat of inflation, also rose in April, while loan growth increased at its fastest pace since the bank began overseeing it in 1999.

Germany — Europe’s largest economy — had cautioned the bank this week against any interest rate increase, saying that inflation in many EU countries was largely a result of factors within individual nations including excessive real-estate prices, generous wage settlements and excessive credit.

German Finance Minister Peer Steinbrueck said a “cautionary monetary policy” was always necessary but suggested there was no need for the ECB to raise interest rates.

Luxembourg Prime Minister Jean-Claude Juncker, however, said inflation — especially in the services sector — was a decidedly real problem.

He and EU Monetary Affairs Commissioner JoaquDin Almunia said a lack of competition — especially in the energy and financial services sectors — was driving prices up.

The International Monetary Fund has said the euro zone is gaining ground, but whether it can sustain that growth beyond 2006 was in question. The baseline scenario is for real gross domestic product growth to remain around 2 percent, its average since last summer, the IMF said.

“A sustained pickup beyond this pace, while possible, appears unlikely given appreciable headwinds, including higher oil prices, a strengthening euro and some weak fundamentals — the decade-long sluggishness of productivity and the decline in the area’s population beginning in 2010,” the IMF said.

The report said that while further increases in interest rates by the European Central Bank seems warranted, “the conditions for continued and thus more substantial tightening do not seem to be in place.”