EU growth prompts interest rate rise

Rising prices have prompted the ECB to lift eurozone interest rates from 2.25 per cent to 2.5 per cent, the highest level in three years.

Jean-Claude Trichet, ECB president, said that the bank expected growth in the 12-country eurozone to reach around 2.1 per cent in 2006, up from his December prediction of 1.9 per cent.

“We should see stronger growth rates over the short term,” Trichet said, but warned that spiralling oil prices could still force further rate rises.

Eurozone inflation is expected to top 2.2 per cent in 2006, above the ECB’s 2 per cent ceiling. Wage increases prompted by the improving economic performance in key markets such as Germany are to blame for the increase.

The bank’s decision to increase interest rates for the second time in three months had been widely expected, with Trichet dropping numerous hints over the last few weeks.

But the bank’s longer-term policy remains unclear, with the bullish expectations of growth in the eurozone as a whole tempered by ongoing weakness in some economies, such as Italy.

But eurozone president Jean-Claude Juncker told Les Echos that the rate rise “would have no impact on growth” as a whole.

The Luxembourg leader warned Trichet last November that precipitous rate rises could harm the burgeoning recovery, but better-than-expected figures from Germany have helped consolidate eurozone growth.

Nonetheless, business leaders criticised the decision, warning that it could impact job creation in particular.

Pierre Simon, president of Eurochambres, the group that represents European chambers of commerce, urged the ECB to think beyond the need to control inflation.

“It is clear that the primary objective of the ECB is to maintain price stability.”

“However, the ECB should not lose sight of its other obligations to support the EU’s economic policies, in particular a high level of employment and sustainable growth.”

Simon added that business growth could also be affected by continued uncertainty over borrowing rates, with a succession of further rate rises likely to put a serious dent in business confidence.

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