ECB likely to raise interest rate to 2.25%

  • Business
  • Thursday, 01 Dec 2005

FRANKFURT, Germany: The European Central Bank is poised to adjust the euro zone's interest rate Thursday for the first time in more than two years, likely voting for an increase to head off what it said were fears of inflation down the road. 

The bank, which controls monetary policy for the 12-nation euro zone, has sent signals over the past two weeks that its refinancing rate would be increased, likely to 2.25 percent from the 2 percent where it has been since June 2003. 

ECB President Jean-Claude Trichet has said the bank's governing council was prepared to "moderately augment'' interest rates - a statement taken as the clearest sign yet that a rate increase is on the way to keep inflation in check. 

That initially cheered analysts and economists, many of whom fidgeted as the ECB held steady over the past two years while the Federal Reserve raised its rates 12 times to 4 percent in the same period. 

The ECB, in contrast, resisted pressure to raise rates in part to keep an ample supply of money in the European economy. 

In a poll of 44 economists by Dow Jones Newswires, all said they expect the ECB to raise the interest rate to 2.25 percent, with another increase to follow in 2006. 

But some have questioned whether now is the right time for a change. 

The Organization for Economic Cooperation and Development said this week that the euro-zone economy was too weak - and inflation too low - to merit a rate increase. 

The OECD credited the euro zone recovery so far in part to low interest rates, a dropping euro and robust export markets.  

But the recovery is not complete and domestic demand is stagnant, so "rates should remain unchanged until the recovery is locked in,'' the OECD said. 

EU inflation rose to 2.6 percent in September versus a year ago from 2.2 percent year-to-year growth in August as oil prices surged. 

The ECB's inflation guideline is just below 2 percent. 

Consumer spending in Germany, Europe's largest economy, fell for the third quarter in a row through September, and last week the Ifo Institute said German business confidence dropped in November. - AP 

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