ECB's Interest Rate Hike Gets Mixed Reception

Faced with a jump in inflation and surging oil prices, the ECB defied increasing political opposition to a tighter monetary policy in the 15-member euro zone by raising its benchmark refinancing rate to 4.25 percent on Wednesday, July 3.

Deutsche Bank's chief European economist Thomas Mayer told Reuters news agency that the increase in borrowing costs risked pushing the economy towards a downswing while Christian Dreger from the Berlin-based Institute for Economic Research believed the economic fallout from the move would be minimal.

"The consequences for economic activity will be limited, so long as (the ECB) keeps to one or two steps," said Dreger.

Klaus Zimmermann, the president of the DIW research institute, agreed that that there would be hardly any impact felt from the ECB decision.

"The interest rate move is very small, it is rather symbolic," he told the German Sueddeutsche Zeitung newspaper. "In terms of the real economy, regarding production and employment, that is, the move will hardly have any effects.

He added that the move would not lead to a slowdown of the economy and consumers would not feel its impact. "Monetary processes are taking a long time until they find their way into the system," he said.

Thursday's decision to raise borrowing costs, according to ECB President Jean-Claude Trichet, was "to prevent broadly based second-round effects" as a result of rising inflation feeding through to a push for higher wages.

New rate doubles ECB target

At just over 4 percent, euro zone inflation now stands at double the ECB's target of "close to, but just below 2 percent" with soaring food and energy costs having sparked a global pickup in inflation.

However, the European Central Bank's decision sends a "clear signal for price stability," German Economy Minister Michael Glos said.

"Growth and jobs can only be secured in the long-term on the basis of stable prices," Glos said in a statement. "The best contribution a central bank can make toward achieving these goals is a credible monetary policy oriented toward stability," he added.

Bert Ruerup, chairman of the German government's panel of economic advisers, said that it was questionable whether the European Central Bank made the right choice in raising rates a quarter point.

"One must ask oneself if a rate increase is the right means of tackling an inflation that above all comes from the high oil price," Ruerep said in an interview with Der Tagesspiegel daily. "Given the expected economic slowdown, I would not have taken this step," the paper quoted him as saying.

Ruerup told the paper that as long as the ECB did not begin a cycle of rate hikes it would not be a problem for economic activity.

French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and German Finance Minister Peer Steinbrueck have all warned the ECB to tread carefully as it sizes up future interest rate policy.

Minimal increase no reason for concern

Angel Gurria, the head of the Organization for Economic Cooperation and Development (OECD), said he supported the decision by the ECB to raise euro zone interest rates, insisting it would not affect growth.

"The question of the (financial) crisis and economic growth does not depend on a quarter of a point," told the French television network France 24.

He said growth instead depended on decisions that national institutions and leaders are prepared to take "in difficult areas such as the budget and economic and fiscal policy."

Gurria added that he was in "total agreement" with the ECB and its president, Jean-Claude Trichet, on the rate hike.

"It's good because it is a signal to the markets but also to economic players ... to say that 'in the area of monetary policy we're still there, we're vigilant, we're not going to let inflation control the situation,'" he said.

EU's economy and workforce will suffer, say unions

Meanwhile, an umbrella group representing leading European trade unions blasted the ECB interest rate hike, calling it "dangerous" and warning that it could harm European growth.

"In short, the ECB's decision is dangerous, counterproductive and not necessary," the European Trade Union Confederation (ETUC) said in a statement. "It's the European economy and European workers that risk paying the price for this."

"The ECB should realize we are no longer living in the seventies. Inflationary wage price spirals are a thing of the past," said ETUC deputy general secretary Reiner Hoffmann.