FRANKFURT -- In a somewhat surprising move, the
European Central Bank
raised its main refinancing rate Thursday by 25 basis points to 3.25%, citing a need to stop inflationary pressures caused by Europe's economic upswing and a weak euro.
That euro-area borrowing costs were heading higher this year was clear to most observers, but the timing of the rate hike surprised some who expected the ECB to wait for at least another month before pulling the trigger.
explained there was no need to wait, as the members of the bank's
were convinced that higher interest rates were necessary to ensure price stability in the euro area. But the smaller and sooner-than-expected increase in interest rates does leave open the prospect of another hike down the road, even though Duisenberg said there should not now be a perceived "bias in any direction."
However, whether the ECB likes it or not, Thursday's action increases the perception that the bank is moving toward a more activist approach in setting monetary policy and raises the prospect of another 25-basis-point hike as soon as next month.
Unlike the bank's last increase, in November, which followed months of buildup and rhetorical preparation, the ECB gave considerably less notice this time. Duisenberg said, however, that he and his colleagues had given plenty of warning, referring to comments he made earlier this week on the inflationary risks of a flagging euro as proof that they had "prepared the markets well enough."
Those comments led to the perception that the ECB was raising rates in a panic reaction to a slumping currency and was simply following Wednesday's quarter-point increase by the U.S.
. Duisenberg denied those accusations, but admitted that the bank has to remain responsive to both "external and domestic considerations."
"Developments in the euro exchange rate are becoming a cause for concern with regard to future price stability," Duisenberg said, although he added that the euro's weakness was one of many important reasons for the rate increase and not the one that tipped the scales for immediate action.
Besides soaring commodity prices and the brightening economic outlook for the euro zone, Duisenberg said M3 money supply growth continued to expand far above the bank's preferred reference value. Those concerns combined with the weak euro made it imperative for the ECB to clamp down and increase interest rates without delay.
Although Duisenberg made considerable mention of the euro's role in the ECB decision, he also remained sanguine about the currency's future. "Growth in the euro area is now robust and this will lead to a strengthening of the euro," he said. The euro recently traded down against the dollar to $0.9867.
The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria. M3 includes cash in circulation, short-term deposits, repo operations and money-market funds.