ECB Raises Interest Rate to 3.75%

The European Central Bank raised its key interest rate by a quarter percentage point to 3.75% on Thursday, despite subdued inflation and volatile global stock markets.

The increase from 3.5% had been widely expected. It was the seventh increase since December 2005 when the rate was 2%.

The ECB sets monetary policy for a 13-nation economy of 317 million people and more than 15% of global gross domestic product.

The decision follows a recent sell-off in world stock markets spurred by worries about the possibility of a global slowdown. Some analysts also said the latest inflation figure for the region that shares the euro as its currency, 1.8% percent for February, undercut the case for a rise. The rate was unchanged from January, but was below the ECB's guideline of just under 2% guideline.

Nonetheless, analysts had widely expected the ECB would raise its key interest rate at Thursday's meeting. In a survey of 55 financial institutions by Dow Jones Newswires, all expected the rate increase and 34 expected the rate to reach 4% by June.

Meanwhile, the Bank of England held a key interest rate steady at 5.25% on Thursday. The decision by the bank's Monetary Policy Committee to keep interest rates on hold followed a quarter of a percentage point rise in January.

Ahead of the ECB rate hike announcement, the German trade union umbrella group DGB warned that any increase was unjustified given that inflation was on the downside last month.

"Such a move is neither justified by downward revised inflation projections nor by the endless repetition of fears regarding unions' alleged excessive wage demands," DGB board member Claus Matecki. said "Should the ECB still opt to hike its key lending rates, one must assume its move is motivated by political reasons."

At last month's meeting of the bank's Governing Council, ECB President Jean-Claude Trichet said that "strong vigilance remains of the essence so as to ensure price stability."

That was a signal that an increase was coming, said Carl Weinberg, chief economist of High Frequency Economics.

"Traders are treating this rate hike as assured," he said. "So are we."

But would an increase cause heartburn for the markets? An increase could strengthen the euro and would likely draw criticism from some European politicians - notably the French - who fear a strong currency could hurt their exports.

Markets could just as easily see the increase as a sign of stability that could help ease the fears of traders.

"While the ECB may confirm that it is watching markets closely, the ECB will probably explain that the plunge in stock prices and the spike in volatility so far pose no major threat to the economic outlook, especially as markets may have underpriced risks in the past," said Holger Schmieding, a European analyst with Bank of America in London.

He said the bank's governing council may even go so far as to lower its inflation forecast for the rest of the year from just around 2% to as low as 1.8%.