European Central Bank President Jean-Claude Trichet said today that the ECB's monetary policy remains 'accommodative' and euro zone interest rates might need to rise further, if economic growth in the single currency area continues pace.
He made his comments after the European Central Bank raised its key interest rates by a quarter of a percentage point - as expected - to their highest level in five years.
The ECB, which last raised its central 'refi' refinancing rate by 0.25 percentage point to 3.25% in October, raised the rate again to 3.5% at its regular monthly policy-setting meeting in Frankfurt.
The increase is the sixth rise in a year from the ECB and comes less than 24 hours after Minister for Finance announced a series of measures to help first time home buyers.
The Government is trying to make things easier for people to get on the property ladder. But the European Central Bank is pulling in a different direction and today increased interest rates yet again by a quarter of one per cent.
First time buyers now usually take out 35 year mortgages. On that basis, a €300,000 loan will cost an extra €46 a month. A €400,000 loan will rise by €62.
Finance Minister Brian Cowen yesterday doubled mortgage interest relief for first time home buyers. For a married couple it gives them an additional €133 a month and €66 for a single person.
Today's rise interest rate does not wipe out the benefit of the budget measures. But in the context of six interest rate rises in the last 12 months, borrowing money is now much more expensive than this time last year.
The 'refi' is the rate at which the ECB provides the bulk of liquidity for the banking system via its regular weekly refinancing operations.
But there are also two other key interest rates: the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem; and the rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem. These were also raised to 2.5% and 4.5% respectively.
Meanwhile, Mr Trichet also said the ECB was raising its euro zone growth forecasts for both this year and next year to 2.7% and 2.2% respectively. The bank had previously been expecting growth of 2.5% for 2006 and 2.1% for 2007.
The ECB chief said the upward revision was largely due to an assumption that lower energy prices would boost disposable income. He added that lower energy prices had also led the bank to predict euro zone inflation rates of 2.2% in 2006 and 2% in 2007, compared with 2.4% in both years previously.
Asked to comment on the euro's recent strength against the US dollar, Trichet would say only that excess volatility in exchange rates was 'undesirable'.
* Northern Rock says it will be increasing interest rates for its savers following the ECB decision.
Its internet account, Demand Online, will increase by 0.15 points to 4.15% from January 3. The rate on Northern Rock's SSIA will increase by 0.25 points to 3.5%. All other variable rate accounts will increase by between 0.15 and 0.25 points.
