Saturday, 9 July 2011

ECB raises interest rates to 1.5%

7 July 2011 Last updated at 20:32 GMT Jean-Claude Trichet: "The further adjustment of the current monetary policy stance is warranted"

The European Central Bank (ECB) has raised interest rates to 1.5% from 1.25% in an attempt to cool inflation in the 17-nation eurozone.

ECB president Jean-Claude Trichet said that inflation, now 2.7%, was likely to remain "clearly" above the ECB's 2% target over the coming months.

He said inflation would be monitored "very closely", seen as a signal that rates are likely to rise further.

The latest increase was the second rate rise since April.

Earlier on Thursday, the Bank of England kept UK rates at a record low of 0.5%. Rates have been held at this level for more than two years.

The ECB's rise was widely expected after Mr Trichet indicated last month that such a move was likely.

He told a news conference after the rates announcement that recent economic data had showed a slowing in eurozone growth.

Continue reading the main story Jonty Bloom Business correspondent, BBC News

If German workers start to think that they are entitled to some of the rewards for that performance and start demanding wage rises to make up for rising prices, inflation may well become established in the eurozone.

The ECB is acting now to try to stop that happening, regardless of the cost to Athens, Dublin and Lisbon.

For countries like the Irish Republic, Greece and Portugal; struggling under a mountain of debt, having to be bailed out and facing seemingly endless austerity measures; an increase in the cost of borrowing is about as welcome as an invitation to inspect the guillotine blade a bit more closely.

But the ECB has to look at the whole eurozone and make its decisions based on that. And it has decided that fighting inflation is a far, far better thing to do.

However, there were "upside risks" to inflation in the medium term because "the underlying pace of monetary expansion is continuing to gather pace," he said.

Higher prices

Mr Trichet said inflation would remain above target over the next few months largely because of higher energy and commodity prices.

The ECB's primary role is to keep inflation low by setting interest rates for the 17 countries that use the euro.

But there are concerns that rising rates will increase borrowing costs, adding to pressure on countries such as Greece and Portugal.

Asked if the rate rise would do more damage the eurozone's periphery economies, Mr Trichet said that "the entire continent would benefit from maintaining price stability and confidence".

He said that confidence was the "solid soil" on which the eurozone would build, despite some countries expanding at a faster pace than others.

The continuing strength of Germany's economy was underlined this week with figures showing that manufacturing orders rose 1.8% in June. Many analysts had forecast a fall.

Meanwhile, Mr Trichet joined in criticism of the credit ratings agencies which followed Moody's decision to downgrade Portugal's debt to "junk".

On Wednesday German Finance Minister Wolfgang Schaeuble said he believed limits should be put on the rating agencies' "oligopoly".

Mr Trichet added his weight, saying: "It is also clear that a small oligopolistic structure is not what is ... desirable at the level of global finance."

He said that despite Moody's downgrade the ECB would support Portugal by continuing to accept the country's debt as collateral in return for funding.


"We have decided to suspend the application of the minimum credit rating threshold... This suspension will be maintained until further notice," he said.

The ECB has played a central role in the debt crisis by keeping banks afloat with emergency cash.

But he repeated firmly that the ECB would not accept a country's bonds as collateral if it had defaulted on its debts.

There has been speculation about whether Greece is close to defaulting, with ratings agencies speculating about the definition of a 'default'.

Mr Trichet said: "We say 'no' to selective default or credit event."

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