(RTTNews) - Thursday, the European Central Bank hiked interest rates in line with expectations amid record high inflation and slowing growth in the Eurozone, while the central bank chief signaled that there are no more hikes in store in the near term.

At the session held in Frankfurt, the Governing Council raised the key-lending rate, which is the minimum bid rate on the main refinancing operations, by 25 basis points to 4.25%. The central bank had maintained the rate at a six-year high of 4% since June last year.

The interest rate on the marginal lending facility was increased by 25 basis points to 5.25%, while the interest rate on the deposit facility was hiked to 3.25%. The new interest rates will take effect on July 9.

Expectations of a rate hike in July were cemented, when data released earlier in the week showed that Eurozone inflation shot up to a new record in June. A flash estimate from the statistical office Eurostat had pegged annual inflation in the 15-nation economy at 4% for June, up from the previous record of 3.7% in May. Inflation reached the highest level since the euro was introduced in 1999 and the highest since June 1992.

Annual inflation continues to stay well above the ECB’s target, which is to keep the inflation rate “below, but close to, 2% over the medium term”. Inflation in the countries following the euro currency is largely driven by higher food and energy costs.

Policymakers are concerned that surging oil and food prices may prompt unions to seek bigger pay hikes, adding further to inflationary pressures in what are called “second round effects”. Speaking at the regular post-meeting press conference, the ECB President Jean-Claude Trichet said the decision to raise interest rates was taken to prevent second-round effects. Trichet had said earlier that the risk of triggering an inflationary wage-spiral is “particularly acute”.

“We will continue to monitor very closely all developments over the period ahead”, Trichet said. He noted that maintaining price stability in the medium term remain policymakers’ primary objective. Signaling an end to the tightening cycle, the ECB chief said the monetary policy stance following the latest hike decision would contribute to achieving that objective.

While deciding to retain the key lending rate in June, Trichet had hinted at the possibility of a rate hike this month, saying it is “not excluded” that the central bank may raise interest rates. He said the Governing Council is currently in “a state of heightened alertness” amid high inflation. He did not make such statements in Thursday’s conference.

Last week, however, Trichet noted that he did not say there could be “a series of increases”, and that policymakers could “never pre-commit”. He reiterated the latter comment on Thursday, saying there was “no bias” on future rate moves. While stating that policymakers take the anchoring of inflation expectations seriously, Trichet asserted that confidence was “absolutely of essence” in the present juncture.

Amid mounting inflationary pressures in the near term, most economists hold the view that the risks of the ECB going beyond the July hike are rising. Growth in the Eurozone is widely expected to slow sharply in the second quarter.

Commenting on the rate hike, Global Insight Chief U.K. and European Economist Howard Archer said, “The interest rate outlook is highly uncertain; but, for now at least, the ECB appears to have moved back to a neutral stance”. The economist noted that the ECB’s statement and Trichet’s comments did little to support the view that this could be the first of a series of interest rate hikes.

Citing the lack of reference to the ECB being in a “state of heightened alertness” or “strong vigilance”, Archer said this suggests that no further interest rate hikes are currently planned in the near term at the very least. “We expect the ECB to keep interest rates at 4.25% through the rest of 2008, before cutting them gradually to a low of 3.50% in the third quarter of 2009″, the economist stated.

The ECB is among the central banks that are struggling to strike a balance between slowing growth and rising inflation. Earlier in the day, the Swedish and the Indonesian central banks raised their key interest rates by 25 basis points to 4.5% and 8.75% respectively, while their Icelandic counterpart maintained its base rate at 15.5%.

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