THE ERA of cheap money in the euro zone ended just before 2pm yesterday when the ECB made public its anticipated decision to raise its main lending rate.
After nearly two years at what president Jean-Claude Trichet called “historically low levels”, the ECB became the world’s first central bank to tackle inflation in the current economic cycle by increasing the key interest rate by 25 basis points to 1.25 per cent.
The unanimous decision of the bank’s governing council was overtaken immediately by speculation that the rate was the first of several this year.
“We will continue to monitor very closely all developments with respect to upside risks to price stability,” said Mr Trichet, using language that usually means another rate increase is looming.
Mr Trichet insisted the governing council “did not decide it was the first in a series” but analysts suggested another rate hike was likely in June or July rather than May.
The “non-standard” measures invoked in the financial crisis were “by construction, temporary”, said Mr Trichet, and no longer warranted. Given heightened inflation risks, the rate hike was intended to keep inflation within the ECB goal of below but close to 2 per cent.
“The stance of monetary policy remains accommodative and thereby continues to lend considerable support to economic activity and job creation,” he said.
Recent economic data indicated a positive momentum to economic activity, though “uncertainty remains elevated”.
It was the ECB’s view that the underlying base of monetary expansion was “gradually picking up but remains moderate”.
The governing council, he said, was pleased to see a more broadly-based lending taking hold in the euro zone, with greater loans to households and the non-financial corporate sector.
Mr Trichet confirmed that the central bank had “encouraged the Portuguese authorities to ask for support”, adding it was essential that euro zone governments achieved their consolidation targets for 2011.
He said no decision had been taken on introducing a special term lending facility for banks that are almost entirely dependent on short term ECB loans for funding. This includes all the Irish banks and the Irish Government has sought the facility.
“We are reflecting on it . . . if and when we decide we will let you know,” he said.
In his economic analysis, Mr Trichet said increasing euro zone exports and a relatively high level of euro zone business confidence were offset by continued financial market concerns, worries about energy prices, due to tensions in north Africa and the Middle East, and the potential economic impact of Japan’s “abominable” recent natural and nuclear disasters.
“We admire the resilience of the Japanese people in such dramatic circumstances,” said Mr Trichet.
The ECB governing council’s decision to act was driven by estimates showing annual inflation in the euro zone had increased to 2.6 per cent in March from 2.4 per cent the previous month.
Higher food and energy prices were driving inflation. Mr Trichet said it was “essential” to prevent knock-on secondary effects in price and wage claims or risk medium-term inflationary pressure.
In addition, he said the current need for fiscal consolidation in the medium term may result in increases in indirect taxes and administered prices in the coming years.
“We are clearly signalling that we are extremely alert in this respect and will not tolerate second-round effects,” Mr Trichet said.
Mr Trichet brushed off suggestions that the Frankfurt-based bank had broken an historical convention by acting ahead of the US Federal Reserve.
