ECB raises rates

7th July 2011

The central bank that sets monetary policy for the 17-country eurozone lifted its benchmark rate by a quarter of a point to 1.5% at its meeting in Frankfurt, led by president Jean-Claude Trichet. City analysts believe this could be followed by another rate rise towards the end of the year, reports the Guardian.

The ECB's willingness to battle inflation is in stark contrast to the stance adopted by the Bank of England's monetary policy committee. It has chosen to ignore high inflation and argued for some time that interest rates need to stay at a record low of 0.5% to support the faltering economy.

Azad Zangana, Schroders European Economist, says: "The move by the ECB was widely anticipated, and we expect one more 25 basis points rate rise this year. We expect the ECB to keep raising interest rates at a rate of 25 basis points a quarter. While our forecast is more aggressive than the market is currently pricing, by historical residence, this is a slow rate normalisation path.

"The latest and future increases in ECB rates will hurt the struggling peripheral economies, but at the same time, work to slow the booming exporters in the north, which need increases in interest rates to avoid higher inflation."

Mr. Trichet said the ECB would "monitor very closely all developments with risks to price stability," omitting the term "vigilance," which he has used in the past to signal an imminent rate increase.

However, he repeated that risks to the outlook for price stability "remain to the upside," while the risk to the outlook for growth remain "broadly balanced" against a background of high uncertainty.

Mr. Trichet avoided any explicit reference to the problems of Greece. Some have speculated that the debt crisis in the euro zone's periphery would inhibit the ECB's intention to tighten policy, reports the Wall Street Journal

Moneymarkets comments on the Guardian report: "The ECB is mandated to achieve price stability, defined as inflation close to but below 2%. Over the past 12 years since inception it has averaged 1.97%. This is a record of which Mr Trichet is – and should be – justifiable proud. A Central Banker who has done the job he was employed to do."

Commenting on the ECB generally – and its possible insolvency, Mindful Money economist blogger Shaun Richards says: "One of the themes of this blog has been that the actions of the European Central Bank have left it looking very exposed. Put another way if you were to give it a credit rating and treat it as an ordinary bank you would be giving it an ever lower one. The reason for this is the bonds and bills it has on its books because of the various support operations it has undertaken in response to the credit crunch."

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