ECB raises interest rates to 4.25%

(Guardian) -- The European Central Bank today raised interest rates in the 15-nation eurozone by 0.25% to stem soaring inflation despite mounting political opposition and increasing signs of a contracting European economy.

Its move, decided unanimously by its governing council, could trigger a round of rates increases from other western central banks in the eyes of some observers but Jean-Claude Trichet, ECB president, made plain it did not signal a series of rates increases - for now at least.

The ECB, put on a state of "heightened alert" last month over surging inflation and determined to reassert its counter-inflation credibility, increased borrowing costs from 4% to 4.25% - the first jump since June last year.

Inflation in the eurozone hit a record high of 4% - or more than twice the ECB's target - last month, partly as a result of oil prices which rose to $146 a barrel today, and Trichet repeatedly warned that further rises in food and energy prices could follow.

He insisted that inflation was now the number one issue among the eurozone's 320 million citizens and the ECB would live up to its mandate to deliver price stability - inflation close to but below 2% - in the medium term. "We tell them very solemnly they can count on us," he told a news conference in Frankfurt.

Financial markets had been expecting the ECB to increase rates at least two more times or close to 5% to avert a so-called wage-price spiral in the face of surging energy and food prices. But most economists believe today's decision will be a one-off and the bank will move to start cutting rates next year as the eurozone economy slumps.

Trichet asserted repeatedly that the rates increase would "contribute to our objective of price stability over the medium term", prompting Philip Shaw, chief economist at Investec to comment: "There's nothing to suggest the ECB has an itchy trigger-finger."

But the bank's president coupled his remarks with a warning to companies and pay negotiators that excessive price and wage increases to claw back soaring commodity and energy costs would indeed trigger further rises in borrowing costs. "I have no bias," he said, reasserting a wait-and-see attitude.