The head of the European Central Bank has hinted at further increases in euro zone interest rates this year, after the bank raised its key rates to the highest level in five and a half years today.
The European Central Bank raised its main interest rate by a quarter of a percentage point to 3.75% after its meeting in Frankfurt today. The move was widely expected.
In a press conference after the decision, Jean-Claude Trichet said the bank still saw its monetary policy 'on the accommodative side' and further tightening might be 'warranted'.
He said that interest rates were now moderate as opposed to low, which is how he described them last month.
This indicates that there will not be a rise in the near future, but that there could be another one this year.
He said that the outlook for euro zone inflation was 'still subject to upside risks'.
However, the outlook for growth in the 13 countries that share the euro remains "favourable," he said, as the bank raised its euro zone growth forecasts for both this year and next year to 2.5% and 2.4% respectively.
Previously, the ECB had been pencilling in growth of 2.2% for 2007 and 2.3% for 2008.
The last time ECB interest rates stood at 3.75% was in September 2001. The bank has now raised its key rate seven times since December 2005, each time by a quarter of a percentage point. The last move was on December 7.
Top ECB officials had carefully prepared financial markets for the interest rate move. They have signalled that the bank remains worried about risks from inflation.
Ulster bank chief economist Pat McArdle said that the ECB's chief gave a signal today that the next move would be upwards, but that his comments may also be interpreted as indicating that rates are now close to their peak.
He said that Trichet indicated today that rates will, more likely than not, rise again but that moves beyond that are not on the agenda at the moment.
He said that Ulster bank's forecast for rates to rise to 4%, remains there, with the most likely scenario is that 4% will be reached around mid-year and will be followed by an extended pause.
Banks and others lenders are now expected to now fully pass on the rate rise to mortgage borrowers. The effect of the quarter-point rise is to add €48 to the monthly annuity repayment on a 35-year €300,000 mortgage.
Added to the the other six increases announced since December 2005, it means that in just 15 months mortgage borrowing costs will have risen by around €105 a month for every €100,000 borrowed.
There was some good news for savers today though, as many banks increased their deposit rates.
Halifax increased its monthly saver account rate by 0.35 points to 7%, after the 0.25-point ECB rate increase today.
The bank says the rate will stay at least 1.5 points above the ECB base rate until January next year.
Anglo Irish Bank also announced its regular saver account rate will rise from 6% to 7% (with minimum rate guarantee of 4.5% pa for the 2 year term). Its 30-day notice account interest rate will rise from 4% to 4.25% and easy access will rise from 3.5% to 3.8%.
Online bank, RaboDirect, also increased its deposit rate from 4.75% to 5% variable today for balances on demand up to €10,000, and Northern Rock increased its variable rates by between 0.15 and 0.25 points.
