ECB Increases Rates by 25 basis points to 4.00%

In June 6, 2007, the Governing Council of the ECB increased the minimum bid rate on the main refinancing operations of the Eurosystem by 25 basis points to 4.00%.

"At today’s meeting, we decided to raise the key ECB interest rates by 25 basis points. This decision was taken in view of the prevailing upside risks to price stability over the medium term that we have identified through both our economic and monetary analyses. Today’s decision will contribute to ensuring that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards fostering sustainable economic growth and job creation in the euro area. After today’s increase, given the positive economic environment in the euro area, our monetary policy is still on the accommodative side, with overall financing conditions favourable, money and credit growth vigorous, and liquidity in the euro area ample. Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted. The Governing Council will monitor closely all developments to ensure that risks to price stability over the medium term do not materialise.

Allow me to explain our assessment in greater detail, starting with the economic analysis. Incoming information clearly confirms that the euro area economy continues to expand at a pace which is significantly stronger than generally expected a year ago. With a quarter-on-quarter rate of 0.6%, real GDP growth in the first quarter of 2007 was again somewhat above previous expectations. Other available information on economic activity, notably various surveys of business and consumer confidence, suggests that solid growth has continued into the second quarter.

Looking ahead, the medium-term outlook for economic activity remains favourable. The conditions are in place for the euro area economy to continue to grow at a sustained rate. As regards the external environment, global economic growth has become more balanced across regions and, while moderating somewhat, remains robust. External conditions thus continue to provide support for euro area exports.

Domestic demand in the euro area is also expected to maintain its relatively strong momentum. Investment should remain dynamic, benefiting from financing conditions which remain favourable, accumulated and ongoing strong corporate earnings, balance sheet restructuring as well as business efficiency gains achieved over an extended period. Meanwhile, consumption should be supported by developments in real disposable income, as labour market conditions continue to improve.

This outlook is also reflected in the new Eurosystem staff macroeconomic projections. The projections foresee average annual real GDP growth in a range between 2.3% and 2.9% in 2007 and between 1.8% and 2.8% in 2008. In comparison with the previous ECB staff projections, the ranges projected for real GDP growth in 2007 are within the upper part of the ranges from March. For 2008, the ranges have been revised marginally d...

ECB Increases Rates by 25 basis points to 4.00%

European Central Bank
6/6/2007 5:38:07 PM