BERLIN -- The European Central Bank today unexpectedly raised its main refinancing rate a quarter of a percentage point to 4.75%, as Europe's monetary authorities decided the move was necessary to keep inflation in check in the 11-nation euro zone.
Observers had anticipated ECB president Wim Duisenberg and his colleagues would have to ratchet borrowing costs higher later this year, but many didn't think the Europe's monetary authorities would raise rates after having done so by a quarter of a percentage point only a month ago.
But, apparently, the euro's extended weakness has raised fears of importing inflation from abroad, as foreign goods such as dollar-denominated oil become more expensive. After the ECB's surprise action the euro was trading slightly higher at $0.8766.
Despite the hike, many ECB watchers believe the move won't be the central bank's last before the end of the year. While the coordinated intervention in the foreign exchange markets has apparently halted the euro's slide, the currency remains at a level that could exacerbate price pressure in the euro area.
"The market's rate outlook is too optimistic," says Catherine Lee, economist for the
Royal Bank of Scotland
in London. "Without a sustained euro recovery, monetary conditions will stay far too lose."
The ECB will continue to hold its refinancing operations as a variable rate tender with a minimum bid rate of 4.75%. The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria.