The European Central Bank raised its key interest rate a quarter of a percentage point to 3.75 percent on Thursday, in a move aimed at keeping growth in check and inflation at bay.
Bank President Jean-Claude Trichet said the ECB would continue to monitor “very closely” issues that could pose risks to price stability — oil prices, wage increase demands and markets, but did not say they warranted strong vigilance.
“After today’s rate decision, our monetary policy continues to be on the accommodative side,” he told reporters after the bank announced the rate increase.
His remarks were seen as a definite signal that the bank is looking at raising rates again, but not likely for at least another two months, putting markets on notice that a rate increase to 4 percent could come by May or June.
“We are constantly alert to price risks,” Trichet said. “Credible alertness is the essence of what we are doing. We know for that reason that inflation expectations are very solidly anchored, as everyone can see.”
In a poll of 55 financial institutions by Dow Jones Newswires this week, 34 of them said they believed the interest rate for the 13-nation economy of 317 million people and more than 15 percent of global gross domestic product could reach 4 percent by the end of the second quarter.
Thursday’s increase, which Trichet said was unanimous, appeared to have little impact on markets and the euro was down nominally to $1.3123 from $1.3178 the night before in New York.
“We continue to be on the accommodative side and I said that interest rates were moderate, last time I said they were low, which is a nuance that speaks by itself,” he said.
Trichet’s remarks came after the Bank of England decided to keep its own interest rate unchanged at 5.25 percent after a several-day selloff in markets from Shanghai to New York spurred by worries about the possibility of a global slowdown. The U.S.’s benchmark interest rate also remains at 5.25 percent.
The rate decisions came after a plunge in Chinese markets spread like a virus across Asia to Europe and the United States, and back around again before equities appeared to steady on Wednesday. The volatility grew after former Federal Reserve Chairman Alan Greenspan remarked last week that a U.S. recession was possible, though not probable, by the end of the year.
Inflation in the 13 euro nations was estimated at 1.8 percent for February, according to EU data. That was unchanged from January, and below the European Central Bank’s just-under 2 percent guideline.
The bank also projected that inflation would likely be in the range of 1.5 percent to 2.1 percent this year, slightly lower than its last forecast in December of between 1.5 percent and 2.5 percent.
For 2008, the bank’s projections call for slightly higher inflation in the range of 1.4 percent to 2.6 percent, up from the 1.3 percent to 2.5 percent made in December.
Trichet said the lower forecast was the result of lower expected energy prices and stronger economic growth in 2008.
But will the increase cause heartburn for the markets? Yes and no. The rise is likely to further strengthen the euro, although initial trading did not reflect that, and draw criticism from European politicians — notably the French — who fear a strong currency could hurt exports and growth.
In Germany, Joachim Poss, a deputy parliament leader with the Social Democratic Party, part of Chancellor Angela Merkel’s governing coalition, criticized the increase, calling it politically motivated.
“There’s no convincing reason for today’s key lending rate increase by the ECB: The euro zone’s (consumer) price increases for the past six months have been below the 2 percent threshold that the ECB sees as relevant,” he said.
Markets could just as easily see the increase, the seventh since December 2005 when the rate was 2 percent, as a sign of stability that could help ease the fears of traders.