Tags: ECB | Boosts | Interest | Rates

ECB Raises Interest Rates, Hints at More Hikes

Thursday, 07 Jul 2011 08:02 AM

The European Central Bank raised its key interest rate to 1.5 percent to dampen inflation and hinted at more increases in coming months, even though they would add pressure on debt-ridden economies like Greece.

Thursday's hike, the second this year, was widely expected but the indication by ECB president Jean-Claude Trichet that there would be further increases this year cemented views that the bank will not be derailed by the debt crisis in its mission to get inflation down.

The ECB's responsibility is to keep inflation, which is running at 2.7 percent, below its target of just below 2 percent.

Trichet said in a press briefing the bank would "monitor very closely" price developments — he traditionally uses that phrase to indicate that the tightening cycle will continue but that rates would not rise next month.

Though higher rates may be necessary for a potentially overheating economy like Germany's, they will add to the growth concerns of the eurozone's more indebted nations, such as Greece and Portugal.

Overall though, Trichet said the eurozone economy grew in the second quarter of the year, albeit at a slower pace than the 0.8 percent recorded in the first quarter and that uncertainty over the economic outlook remains elevated.

"We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet said.

Trichet said it was important that Greece continue with its austerity measures to take control of its public finances. Pressing hard on costs while avoiding a damaging debt default would make the Greek economy more resilient with higher growth and lower unemployment, he added.

Once again, Trichet insisted that any private sector involvement in a second bailout of Greece should be on a voluntary basis and that nothing should be done that prompts the credit rating agencies to slap a "selective default" rating on the country.

Eurozone governments are in discussions with banks and other financial institutions to get them to share part of the burden of a second Greek bailout, which is expected to be completed by September.

Even though Greece got a 110 billion euro ($157 billion) bailout package last year, it's going to need more money as it remains effectively locked out of international bond markets. Expectations are that the second bailout will be more or less the same size as the first.

Earlier in the day, the Bank of England held its base interest rate at an all-time low of 0.5 percent as the tepid economic recovery in Britain continues to outweigh concerns over inflation.

Thursday's decision by the nine-member Monetary Policy Committee to keep the rate unchanged for the 28th straight month was also anticipated in markets.

Though inflation is running at more than double the Bank's target of 2 percent at 4.5 percent, the majority of rate-setters think inflation will drop quickly next year as the impact of rising energy costs drops out of annual comparisons.

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