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March 23, 2011

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Central banks ready to raise rates in Europe

EUROPEAN central bankers signaled on Monday they stood ready to raise interest rates next month despite uncertainty linked to Japan's nuclear crisis and the ongoing struggles of euro members Greece, Ireland and Portugal.

Eurozone finance ministers meeting in Brussels sealed an agreement on funding of a new safety net for the bloc, but left it to a summit of EU leaders later in the week to work out a deal with Ireland on debt relief and forge a compromise on boosting an existing rescue facility.

Meanwhile, Portugal's government warned it could step down even before that summit takes place if opposition parties block new spending cuts in a parliamentary vote expected today.

That would ratchet up pressure on the country to follow in the footsteps of Greece and Ireland and seek a bailout from the European Union and International Monetary Fund.

Investors appear increasingly confident the bloc can prevent its sovereign debt woes from spreading beyond Portugal, given progress on a package of anti-crisis measures leaders are expected to sign off on by Friday.

The risk premium markets demand to hold Spanish 10-year debt, for example, has fallen to its lowest level since early February, and the euro pushed above US$1.42 on Monday for the first time in over four months.

Rising inflation in core European countries like Germany has convinced the European Central Bank it is time to push up its benchmark rate, which has stood at a record low 1.0 percent since May 2009.

ECB President Jean-Claude Trichet shocked markets in early March by saying the bank could raise rates as early as April and he made clear on Monday that this message was still valid even after Japan's devastating earthquake, tsunami and nuclear disaster.




 

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