European bank OKs rise in key rate

June 09, 2006|By NEW YORK TIMES NEWS SERVICE

MADRID, Spain -- The European Central Bank raised its benchmark interest rate yesterday by a quarter-point to 2.75 percent but avoided saying that it would sharply tighten credit to control inflation.

Jean-Claude Trichet, president of the central bank, said the bank would continue to increase borrowing costs gradually, a course it began in December as part of a long-expected worldwide trend toward higher rates.

Also yesterday, central banks in South Africa, India, Denmark and South Korea all increased their interest rates, after Turkey did the same Wednesday. The U.S. Federal Reserve Board, which has recently expressed concerns about inflation, now appears likely to follow suit this month.

Major stock indexes fell sharply in Asia and Europe yesterday, while stocks plunged in the United States early, then remained steady through the market's close. The dollar reached a one-month high against the euro as investors digested the possibility of more lucrative investments that come with higher United States rates.

After two years of holding its benchmark rate at 2 percent, the European Central Bank has raised it three times, by a quarter-point each time, over the past nine months. Trichet said the bank would decide on the pace and magnitude of further increases based on the developing European outlook for inflation and growth, and not on any preset course.

"We are always free to do what we judge is appropriate," he said.

He said the 18 members of the bank's rate-setting body had discussed the possibility of raising rates by a half-percentage point yesterday, but that the "overwhelming sentiment" in the group was for the smaller increase.

Some central bankers in Europe over the past month had refused to rule out the bolder move after inflation in countries that use the euro currency accelerated to an annual rate of 2.5 percent in May -- well above the bank's informal target of 2 percent.

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