ECB hikes interest rates

ECB hikes interest rates
Trichet nudges rates higher. Photo: DPA
The European Central Bank raised its key interest rate as expected by a quarter of a percentage point to 4.25 percent on Thursday to combat surging inflation in Germany and the rest of the euro zone.

It is the first time that the Frankfurt-based ECB has hiked borrowing costs since June 2007. Economists had been expecting Europe’s central bankers to raise rates in the face of record inflation in several euro-area members. ECB President Jean-Claude Trichet made clear in June that the bank was more worried about high energy and food prices than the damping effect higher interest rates might have on the euro-zone economy.

“Today’s decision will help monetary policy achieve the goal of price stability,” said Trichet at a press conference in Frankfurt, adding that Thursday’s increase did not mean there would be more on the way. “Our course isn’t predetermined. We will do what’s necessary in order to preserve purchasing power. The citizens can depend on us.”

Euro-zone inflation hit a record 4.0 percent annual rate in June – the highest it’s been since the ECB took over monetary policy for 12 EU nations in 1999. But several leading European politicians – in particular French President Nicolas Sarkozy and German Finance Minister Peer Steinbrück – have criticized the central bank for putting fighting inflation over spurring growth.

But Jürgen Thumann, the president of the (BDI) Federation of German Industry, welcomed the rate hike in light of surging inflation. “The European Central Bank’s decision might be uncomfortable, but it’s necessary and the right thing to do,” he said.