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Fighting Inflation

ECB Announces Interest Rate Hike

The European Central Bank has, as predicted, increased the key interest rate to 4.25 percent. The bank wants to curb soaring inflation in the euro zone but critics warn the move could slow economic growth.

When the announcement came it was hardly a surprise. The European Central Bank raised interest rates for the first time in a year on Thursday, in an effort to combat soaring inflation in the 15-nation euro zone.

In a widely predicted move, the Frankfurt-based bank -- which is reponsible for managing Europe's single currency, the euro -- said it was raising the key rate by a quarter point to 4.25 percent, despite fears in some quarters that the move could slow economic growth.

On Thursday, ECB President Jean-Claude Trichet told reporters that the fundamentals of Europe's economy were "sound," but he said inflation would remain high "for a more protracted period than previously thought."

"The monetary policy stance after today's decision will contribute to achieving our objective of price stability," he told the press conference.

Analysts had been expecting the move, particularly after the European Union's statistics office, Eurostat, announced on Monday that inflation for the euro zone area had hit a record 4 percent in June.

However, politicians and trade unionists have been critical of any move that could slow down growth at a time when consumer and business confidence is dipping in many European Union member states.

Despite these warnings the ECB opted for the interest rate hike at its regular council meeting in Frankfurt on Thursday. ECB President Trichet had already indicated that the bank would need to take this measure since the bank's principal focus is curbing inflation. The ECB target inflation rate for the euro zone is slightly below 2 percent.

smd/ap/reuters