[full article at http://www.iht.com/IHT/TODAY/FRI/FIN/ecb.2.html ] Paris, Friday, October 6, 2000 ECB Raises Key Rate Amid Signs of Slowing Move Isn't a Risk to Growth, Duisenberg Insists By John Schmid International Herald Tribune FRANKFURT - The European Central Bank surprised markets Thursday by raising interest rates just as fresh evidence was pointing toward a slowdown in the 11-nation economy. The president of the European Central Bank, Wim Duisenberg, said the move had been aimed at containing inflationary pressures and insisted that the economy could withstand tighter credit conditions. ''We see no threat to growth'' from this rate increase, Mr. Duisenberg said. He said the euro-zone economy was at ''cruising altitude.'' The bank raised its benchmark money-market rate a quarter of a percentage point to 4.75 percent, its seventh increase in less than a year. Since November, the bank has lifted rates by 2.25 percentage points. The move stunned economists who feared the euro zone's recovery had grown fragile. ''They keep raising rates into a slowing economy,'' said Thomas Mayer, chief European economist at Goldman, Sachs & Co. ''It is hard to see why they would have done it today other than to try to prop up the euro.'' If the rate move was aimed at shoring up the euro, its benefits were short-lived. The currency rose briefly as high as 87.86 U.S. cents but by 4 p.m. in New York, it fell to 86.91 cents, down from 87.46 cents Wednesday. Its record low is 84.92 cents, reached Sept. 20. Many economists say higher growth, not higher rates, will prove the best support for the euro. The rate increase comes in the roughest operating environment for the European Central bank since it was created along with the euro in January 1999. The currency has failed to respond to previous rate moves that theoretically should have given it a lift by enhancing euro-denominated yields. Now the bank has tightened the money tap again just as oil prices and the earlier tightenings have crimped economic confidence and possibly capped the region's recovery. ''There are cracks in the recovery,'' said Adolf Rosenstock, European economist at Nomura International PLC. France this week reported its biggest single-month slump in consumer confidence in five years, dropping its index to its lowest level in 14 months. In Germany, business confidence fell for the third consecutive month in August. Two weeks ago, major central banks joined the European Central Bank to intervene in the open markets and buy the euro out of a shared concern that the devalued currency could adversely affect the world economy. Mr. Duisenberg said: ''While the possibility cannot be ruled out that the increase in oil prices as such may temporarily dampen growth dynamics over the short run, the forces underlying solid growth in the medium term remain in place. The ECB seems intent on crushing any inflation that stems from high crude oil prices and the weak euro. It cannot afford to appear soft on inflation, analysts said, when its own credibility is on trial and the euro under pressure. ''Today's decisions continue to aim at ensuring that upward pressures on consumer prices stemming from oil prices and the foreign-exchange rate of the euro do not translate into more permanent inflationary tendencies.'' The largest euro-zone economies, Germany, France and Italy, have little reason to want higher rates, economists suggest. But several others, such as Ireland, Portugal, Finland and the Netherlands, all have brisk growth and rising inflation. Still, Mr. Duisenberg said, ''We had the maximum possible degree of consensus on today's decision.'' In other trading, the dollar fell to 109.12 yen from 109.37 yen but rose to 1.7505 Swiss francs from 1.7367 francs. The pound fell to $1.4465 from $1.4592.
