The ECB raises interest rates by 0.25 points to 2.50%

Trichet justifies the rise to prevent future inflation

Trichet justifies the rise to prevent future inflation


The European Central Bank (ECB) decided to raise the basic interest rates in the eurozone by 0.25 percent, to 2.50 percent, to control inflationary pressures in the eurozone, such and as expected the financial markets. This increase will have limited economic effects, even in the eurozone countries in which mortgages adjust to a large extent at variable rates.

The president of the ECB, Jean-Claude Trichet, justified the rise in rates with the highest inflation risks expected for 2006 and 2007. At a press conference, after the monthly meeting of the governing council of this entity, Trichet said that it can expect an impact on inflation in that period due to “indirect effects in the past due to the increase in oil prices”. The increase in the price of money to 2.50 percent, will help to ensure that medium and long-term inflation expectations in the euro area will remain firmly anchored at levels consistent with price stability, the ECB president added.

He also pointed out that there are signs that economic activity is improving in the twelve countries of the euro, which “will have higher rates of growth in the short term, as reflected by various indicators.”

In this regard, he said that the quarterly internal projections of this central bank predict growth of the Gross Domestic Product (GDP) between 1.7 and 2.5 percent in 2006, and between 1.5 and 2.5 percent. in 2007, figures that imply a slight upward revision with respect to data from last December.

Inflation predicted this year

Inflation predicted this year

Regarding inflation, Trichet predicted that the price increase will move this year between 1.9 and 2.5 percent and in 2007, between 1.6 and 2.8 percent, percentages They also exceed the ECB internal forecasts for December.

In general terms, the president of the European Institute warned that the upward risks for the evolution of prices persist. These risks also include further increases in oil prices and the effects that are dragged on consumer prices by the present and past escalation of crude oil.

The entity has been concerned about the upward risks to prices derived from the strong expansion of the amount of money in circulation, the rise in oil prices and the improvement of the economic activity in the area.

Stability on prices ensured




Year-on-year inflation in the eurozone fell by one-tenth in February, to 2.3 percent, according to a first estimate released by the Eurostat community statistics office but is still above the level set by the ECB to ensure the stability of prices: “close but always below 2 percent”.

At the same time, the euro area economy has shown clear signs of recovery, so that low rates are no longer necessary to help boost growth. For example, the unemployment rate remained stable in January in the eurozone, at 8.3 percent, and the Business Climate Indicator (ICE), which measures the economic confidence of companies, rose 0.27 points in February and stood at 0.61 points.

The monetary entity has warned for months that the growth of credit in the area is still high, especially in mortgages, and has shown great concern about the sharp increase in liquidity. The loans for the payment for the purchase of a house were in January at 11.7 percent, compared to 11.5 percent last December- Home. The current low level of the price of money is one of the causes of this robust monetary dynamics, according to the entity, which observes the growth of prices to forecast inflation and decide on monetary policy. 

In many countries, such as Spain, mortgage loans are generally set at a variable rate that depends on the Euribor, which is the main benchmark that sets interest on these loans, but not others like Germany. Commerzbank monetary policy expert Michael Schubert told EFE that this small rise in the price of money “is a warning signal to the markets” because, in some countries, such as Spain, there is a danger of overheating real estate prices and the formation of a bubble and its subsequent explosion. However, Schubert said the economic consequences of this change in rates will be small and short-term since a rate level of 2.50 percent is still “extraordinarily low”.

The ECB raised rates for the last time in December last year, also by a quarter of a percentage point, the first rate increase in the euro area in more than five years.

Monetary policy experts expect the entity to increase interest again at the beginning of the summer, also by 0.25 percent, and by the end of the year, the price of money will be at 3 percent.

For the experts, it is clear that the mortgages that are set in reference to the Euribor will continue to rise and that the end of a stage of cheap money begins, which in countries such as Spain has helped to trigger the prices of housing.