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MONETARY POLICY : ECB RAISES BENCHMARK RATE TO SEVEN-YEAR HIGH.

Unsurprisingly - the initiative was largely anticipated by investors - the European Central Bank (ECB) decided, on 3 July, after 13 months of status quo, to raise by 0.25% its benchmark rate to 4.25%, the highest in seven years.

Since the creation of the euro on 1 January 1999, the ECB has changed its rates 24 times (16 increases and eight decreases). Its last increase dates back to June 2007, before the outbreak of the American subprime mortgage crisis.

By raising its rates, the ECB wants to avoid persistent tensions from contaminating the whole of the economy and turning into a sustainable price slippage. ECB President Jean-Claude Trichet had, in advance, justified this increase, describing the consumer price situation in the eurozone as "a state of high alert". Inflation in annual rates reached 4% in June, according to provisional data from Eurostat. This is double the ECB's objective of 2%.

However, analysts believe that the inflation rate is largely due to the increase in the prices of food and oil products and that underlying inflation (outside of energy and food) has, on the contrary, decreased. The pertinence of a turn of the monetary screw has also been challenged by political leaders of the eurozone, including Spain and France, which argue that the situation is already waning. In any event, Trichet also specified, before MEPs, that he did not plan successive increases in the ECB's interest rates.

The European currency was stable on 3 July at US$1.5880 for one euro, after the ECB's decision.

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Publication:European Report
Date:Jul 4, 2008
Words:255
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