European Central Bank raises interest rate

The Governing Council of the European Central Bank has decided to increase the key ECB interest rates by 25 basis points, after raising rates by 25 basis points in April 2011 from historically low levels.

ECB president Jean-Claude Trichet said the further adjustment of the monetary policy stance was warranted in the light of upside risks to price stability.

“The underlying pace of monetary expansion is continuing to gradually recover, while monetary liquidity remains ample with the potential to accommodate price pressures in the euro area. All in all, it is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term.”

Trichet said the ECB’s decision will contribute to keeping inflation expectations in the euro area firmly anchored to 2%.

At the same time, interest rates across the entire maturity spectrum remain low. Trichet said the interest rate increase remains “accommodative” and lends support to economic activity and job creation.

“As expected, recent economic data indicate some deceleration in the pace of economic growth in the second quarter of 2011. While the underlying momentum of economic growth in the euro area continues to be positive, uncertainty remains elevated. We will continue to monitor very closely all developments with respect to upside risks to price stability,” Trichet said.

In the first quarter of 2011 euro area real GDP posted a strong quarter-on-quarter increase of 0.8%, following the 0.3% increase in the last quarter of 2010.

Recent statistical releases and survey-based indicators point towards a continued expansion of economic activity in the euro area in the second quarter of this year, albeit at a slower pace.

Trichet said that this moderation reflects the fact that the strong growth in the first quarter was in part due to special factors. “On the one hand, favourable business confidence could provide more support to domestic economic activity in the euro area than currently expected, and higher foreign demand could also contribute more strongly to growth than expected.

“On the other hand, downside risks relate to the ongoing tensions in some segments of the financial markets that may potentially spill over to the euro area real economy... further increases in energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances,” Trichet said.

With regard to price developments, euro area annual household inflation was 2.7% in June 2011 according to Eurostat’s flash estimate – the same rate as in May. The relatively high inflation rates seen over the past few months largely reflect higher energy and commodity prices.

Inflation rates are likely to stay clearly above 2% over the coming months. Upward pressure on inflation, mainly from energy and commodity prices, is also still discernible in the earlier stages of the production process.