Rate rise signals ECB serious about inflation

By Krista Hughes and Jason Webb

FRANKFURT/SAN SEBASTIAN, Spain (Reuters) - The European Central Bank's interest rate rise sends a signal that it is serious about combating inflation, policymakers said as they staged a public relations offensive to justify Thursday's increase.

A day after raising rates to a seven-year high of 4.25 percent, policymakers around the 15-nation region denied that the increase would choke economic growth and said soaring inflation was a bigger danger to consumers.

Luxembourg's Yves Mersch said the ECB could do little to influence soaring international commodity prices but it could take steps to head off euro zone wage pressures. "We are sending a signal today which shows that we are determined to act against home-made inflation," he told the Luxemburger Wort newspaper.

Inflation rose to a record 4 percent in June and policymakers have vowed to prevent these high rates from pushing up inflation expectations, prompting workers to demand big pay rises and firms to jack up their prices.

Expectations calculated from yields on some inflation-linked bonds are at record highs and ECB Executive Board member Jose Manuel Gonzalez-Paramo said it was vital to keep these in check.

"If these expectations become permanent in the system, we are lost," he told a seminar in San Sebastian, Spain.

The ECB raised rates by 25 basis points but President Jean-Claude Trichet said the Governing Council had no bias in favor of further rate moves, damping bets on another increase soon.

Other policymakers including Italy's Mario Draghi, Germany's Axel Weber, Cyprus's Athanasios Orphanides and Austria's Klaus Liebscher, gave little away about the future path of rates, but backed Trichet's message of rising inflation worries.