ECB raises interest rates by 0.25% to 4.25%
3 July 2008
The ECB conformed to market expectations and controversially raised interest rates for the first time in more than a year, by 0.25% to 4.25%, in response to heightened inflationary pressures.
The decision came as little surprise after ECB President Trichet signalled the move last month citing concerns over rising prices across Europe. Subsequently Eurozone consumer price inflation jumped to 4.0%y/y in June, leaving it a full 2.0% above the ECB’s inflation target of “below, but close to 2.0%.” Meanwhile, soaring energy costs pushed May factory gate prices up 7.1%y/y earlier this week, which unless absorbed by retailers via lower profit margins, eventually translates into higher costs for consumers.
However, like the Fed and the Bank of England, the ECB is also faced with indisputable signs of slowing economic growth with both services and manufacturing PMI for June falling into contraction earlier this week. Whereas the US and UK central banks take the view that slowing activity will dampen inflation in the medium term, the ECB seem fixed on a more hard-line approach and appear prepared to risk accelerating the slowdown in order to quash short-term inflation pressures.
More so than usual, the focus now shifts to the accompanying news conference at 1.30pm to see if Trichet will suggest another rate hike is on the way.