Defiant ECB opts for 'one-off' rate rise

The European Central Bank yesterday raised interest rates for the first time in five years. But Jean-Claude Trichet, the ECB president, gave a clear signal the bank has no plans for a series of increases.

The ECB's 18-strong governing council, warning of risks to price stability, unanimously agreed to increase rates in the eurozone from a 30-month low of 2% to 2.25%, seeking to buttress its credibility in the face of political pressure not to make the move.

Unlike the Bank of England, the ECB takes no votes on monetary policy and acts by consensus, though Mr Trichet indicated that some members wanted a bigger increase, raising rates by a pre-emptive 50 basis points, and others sought firmer evidence of economic recovery before agreeing an increase.

This and Mr Trichet's comments that the ECB had no intention of following the US Federal Reserve with a series of rate increases prompted analysts to dub the increase "dovish" and pencil in the spring of 2006 for a fresh rise in borrowing costs, with another in the autumn.

The ECB president did not repeat previous remarks about the need for "strong vigilance" about inflationary expectations, preferring to stress that the bank would "closely monitor" the risks to price stability.

As the euro dipped against the dollar and pound, the French and German finance ministers, Thierry Breton and Peet Steinbrück, who had both argued against a rate increase, insisted that the moderate tightening of monetary policy would not damage the outlook for growth.

Mr Steinbrück, who saw German unemployment drop below 11% last month, with a fall of 25,000 in the number of jobless to 4.53 million, said: "As long as it remains just a quarter-point rise and is not the start of a continuing series then we can cope with it ... I don't believe it will have a big negative impact."

Karl-Heinz Grasser, Austria's finance minister, said the decision "neither helps in the fight against inflation nor favours growth in Europe". But Joaquin Almunia, EU economic and monetary affairs commissioner, argued that all conditions remained in place for a pick-up in domestic demand.

Pointing to an as yet fragile recovery, Ernest-Antoine Seillière, president of Unice, the EU business lobby, warned that the moderate rate rise was not a positive signal for growth - especially if it triggered renewed strength in the euro.

The European TUC denounced the decision. "If the ECB wanted to give a warning signal to trade unions on upcoming wage negotiations by increasing its interest rate, this was totally unnecessary. Trade unions in Europe already understand the need to have wage increases compatible with the objective of price stability," John Monks, ETUC leader, said.

As the German engineering union IG Metall signalled a demand for 4.5-5% wage increases, Mr Trichet said the "warranted" rate rise came amid internal forecasts of higher inflation and growth.