20000212ECB says hike was pre-emptive, euro a factor

FRANKFURT: The European Central Bank said on Thursday that last week's interest rate rise was aimed at ensuring there would be no obstacles to Europe's recovery and its president said the weak euro helped trigger the decision.

In its annual report, the ECB cited the fact that the economic upturn in Europe was starting to gain pace and fears that a pick-up in inflation could feed into high pay rises as key motivations for the decision.

ECB President Wim Duisenberg, in an interview with the Sueddeutsche Zeitung, added that the euro's extended dip below a one-for-one rate with the dollar in late January cemented the timing on a move which was already in the pipeline.

"The exchange rate did play a role, insofar as we carried out the interest rate rise by 0.25 point, which would have come in any case, as early as February due to the euro weakness in the second half of January," he said.

The ECB raised the cost of borrowing by 25 basis points last week, lifting the main refinancing rate to 3.25 percent and raising two other key rates by the same margin.

The move was initially criticised by some economists as a panicky move to throw a lifeline to the flagging euro.

The ECB itself has maintained throughout that the weak euro, and particularly concerns that it could boost inflation, played a role in its decision but has made clear that a euro rescue was not the sole motivation for the move.

PRE-EMPTIVE MOVE TO COUNTER PROBLEMS

In its February monthly report, the ECB spelled out that increased economic growth should lead to job creation and a cut in jobless queues, which stood at 9.6 percent of the working population in December.

"Recent economic developments in the euro area confirm that an upswing is well under way...The acceleration in economic activity is expected to lead to continued employment growth and to further reductions in unemployment in the future," it said.

It stressed that its decision to tighten policy was forward-looking, aimed at countering problems that could arise if wage settlements this year were too high and therefore endangered price stability.

Oil price gains and rising import prices due to the weak euro together added up to a scenario where fears about inflation could themselves contribute to price rises being perpetuated.

"Taken together, these factors point towards an increasing risk of second round effects on consumer prices," the ECB said.

Under these circumstances, a well-timed and to some extent pre-emptive rate rise seemed prudent to ensure conditions for continued economic expansion, the ECB said.

"Against this background, a monetary policy which has a forward-looking orientation needs to respond in a timely fashion, thereby also contributing to ensuring sustainable growth in the euro area," the ECB said.

EURO INTERVENTION NOT FULLY RULED OUT

Duisenberg, quizzed about the performance of the euro and what the ECB planned to do about it, said the ECB could not and should not do anything directly to influence the euro's exchange rate but added he would not fundamentally rule out intervention.

The vague prospect of the central bank stepping in to the market to support the currency gave a brief boost to the euro which overall looked weak at 98.33 cents. Asked whether there was a floor set at which the ECB would defend the euro at all costs, Duisenberg said, "If there were such a limit, I wouldn't tell you. But there isn't one."

The ECB president said he was confident the debate over the euro's value would die down when the fledgling single currency strengthened, as the central bank was predicting. -Reuters