European Central Bank Boosts Rates

The European Central Bank raised its key monetary policy rate by a quarter point on Thursday, as widely expected, to fight rising inflation on the back of oil and food price rises and said it that it will continue to monitor the situation "very closely."

"This decision was taken to prevent broadly-based second-round effects and to counteract … inflationary pressures medium term," ECB President Jean-Claude Trichet told a news conference. "Starting from here, I have no bias."


The euro lost ground against the dollar as Trichet also hinted that there were risks to economic growth, and failed to mention any of the words considered by markets code-language for future hikes.

"It's very clear that to the extent that they precommit -- which is really only for one month ahead -- they have no intention to move again," James Shugg, International Economist at Westpac, told Reuters.

But other analysts said it is unlikely that the bank will stop at only one hike.

"They (the markets) are going to go and price in even more rate hikes than are currently in the curve," Lena Komileva, chief economist at Tullett Prebon, told "Power Lunch Europe."

Trichet stressed that the ECB's primary objective was maintaining price stability, saying that it will preserve purchasing power in the area and this, in turn, will promote sustainable economic growth.

"The fundamentals of the euro area remain sound, and the euro area doesn't suffer from major imbalances," he said, adding that "unemployment has fallen to levels not seen in 25 years."

Policymakers across the 15-member euro zone tried to persuade ECB President Jean-Claude Trichet to refrain from hiking the rate, saying signs of weakness were multiplying and the central bank should also be the guardian of economic growth.

On Wednesday, three French Members of Parliament sent a letter to Trichet urging him to refrain from hiking the rate, while an online petition to stop the rate hike gathered over 10,000 signatures in one month.

French president Nicolas Sarkozy spoke against the rate hike, and this time German Finance Minister Peer Steinbrueck, who last year was stating publicly that he loved a strong euro, joined in, saying the ECB should consider the impact of its rate decisions on the zone's economies.

But on Thursday Trichet stressed again that the ECB is independent and said the decision to raise the rate was unanimously taken by the members of the governing council.

The monetary authority was not happy with some decisions taken by governments in the member states which were likely to put pressure on inflation, but citizens in the euro zone should not fear price rises, he added.

"We very solemnly tell them they can count on us to guarantee price stability in medium term. It is our mandate, it is our duty," Trichet said.

Economic conditions have deteriorated markedly in the area since last year, with even the strongest economy, Germany, showing signs of fatigue.

Confidence indicators released last week suggested the euro zone's economy was close to stagnation last month and is heading for further slowdown, while the manufacturing sector contracted in June for the first time in three years and there are signs unemployment might pick up.

Oil prices surged to a new record high above $145 on Thursday, with a weak dollar and supply worries weighing on the market, but U.S. Treasury Secretary Henry Paulson said the softer greenback can't be blamed for the spike in crude prices.

Investors are looking for clues on whether more monetary tightening is in the cards.

"With the economic slowdown becoming more severe and inflation at a record high 4 percent, the ECB is still stuck in a balancing act, even after today's hike," ING Bank analyst Carsten Brzeski wrote in a market note.

The market was likely to interpret any reference to further inflation dangers as a hint at another rate rise, analysts said.