ECB hikes rates, hints more ahead
Source: Agencies |
July 8, 2011, Friday
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Print Edition
Print Edition
THE European Central Bank yesterday raised interest rates for the second time this year and signaled further tightening to come in its bid to tackle inflation despite the eurozone's intensifying debt crisis.
But it offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, commiting to keep providing it with liquidity.
"We will continue to monitor very closely all developments with respect to upside risks to price stability," ECB President Jean-Claude Trichet told a news conference after the bank raised rates by 25 basis points to 1.5 percent.
Economists said before the news conference that use of that phrase would signal a further rate rise in 2011, likely to be in the last three months of the year.
Eurozone inflation held at 2.7 percent in June, well above the ECB's target of just under 2 percent. Trichet said monetary policy remained accommodative even after yesterday's increase.
The rise in the ECB's benchmark interest rate to 1.5 percent was widely expected after the bank's recent reiterations that it was in "strong vigilance" mode.
"No surprise at all," Berenberg economist Holger Schmieding said of the quarter-point rise.
The ECB raised its subsidiary overnight deposit and borrowing rates in unison, opting not to re-widen its so-called rate "corridor."
Recent eurozone data has generally disappointed. The latest industrial orders rose less than expected, while growth in the bloc's dominant service sector has also slowed sharply.
A Reuters poll found economists have softened their rate hike view as the eurozone debt crisis has escalated over the last month. The ECB's key rate is expected to rise just once more this year, to 1.75 percent, with only two quarter-point increases forecast to follow for all of next year.
In contrast, the Bank of England kept rates on hold yesterday.
The downgrading of recently bailed-out Portugal's credit rating to junk rattled financial markets Wednesday and cast new doubt on European efforts to rescue distressed eurozone states without debt restructuring.
The ECB has pledged to keep liquidity flowing to eurozone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral for now, come what may.
"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said. "This suspension will be maintained until further notice."
But it offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, commiting to keep providing it with liquidity.
"We will continue to monitor very closely all developments with respect to upside risks to price stability," ECB President Jean-Claude Trichet told a news conference after the bank raised rates by 25 basis points to 1.5 percent.
Economists said before the news conference that use of that phrase would signal a further rate rise in 2011, likely to be in the last three months of the year.
Eurozone inflation held at 2.7 percent in June, well above the ECB's target of just under 2 percent. Trichet said monetary policy remained accommodative even after yesterday's increase.
The rise in the ECB's benchmark interest rate to 1.5 percent was widely expected after the bank's recent reiterations that it was in "strong vigilance" mode.
"No surprise at all," Berenberg economist Holger Schmieding said of the quarter-point rise.
The ECB raised its subsidiary overnight deposit and borrowing rates in unison, opting not to re-widen its so-called rate "corridor."
Recent eurozone data has generally disappointed. The latest industrial orders rose less than expected, while growth in the bloc's dominant service sector has also slowed sharply.
A Reuters poll found economists have softened their rate hike view as the eurozone debt crisis has escalated over the last month. The ECB's key rate is expected to rise just once more this year, to 1.75 percent, with only two quarter-point increases forecast to follow for all of next year.
In contrast, the Bank of England kept rates on hold yesterday.
The downgrading of recently bailed-out Portugal's credit rating to junk rattled financial markets Wednesday and cast new doubt on European efforts to rescue distressed eurozone states without debt restructuring.
The ECB has pledged to keep liquidity flowing to eurozone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral for now, come what may.
"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said. "This suspension will be maintained until further notice."
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