ECB's 1st rate hike since July 2008
By Paul Carrel |
April 8, 2011, Friday
|
Print Edition
Print Edition
THE European Central Bank raised interest rates by 25 basis points to 1.25 percent yesterday, announcing its first hike since July 2008 to counter firming inflation pressures in the 17-country eurozone.
The euro was steady after the decision, which ECB policy makers had flagged heavily in advance. All but four of 80 economists polled by Reuters last week expected a 25 basis-point rise.
The increase in the ECB's benchmark refinancing rate marks a gentle exit from the central bank's policy response to the global financial crisis. It had held the refi rate at a record low 1.0 percent since May 2009.
The ECB also raised its deposit rate by 25 basis points to 0.50 percent, and increased its marginal lending rate by the same amount to 2.0 percent.
"A - no surprise. B - the eurozone economy is strong enough to stand it, and C - it will be a little problem for the eurozone periphery but as long as the eurosystem continues generous emergency assistance for stricken banks in the periphery, the periphery can bear it," said Berenberg Bank economist Holger Schmieding.
The rate decision came less than 24 hours after Portugal announced it was seeking European Union support, a decision long expected by financial markets.
For months the central bank has been privately pushing Lisbon to accept assistance, and the fact it has finally happened may free the ECB to take a firmer line on the budding inflationary risk.
The ECB is concerned that firm oil prices - near 2-1/2 year highs - could boost inflation expectations and financial markets are pricing in two further quarter-point rises in interest rates this year to follow a move yesterday.
But the Frankfurt-based bank must be careful not to hurt the eurozone's struggling economies by jacking up rates fast and Jean-Claude Trichet, who shocked markets last month by signaling an April hike, may not want to heighten expectations for further rises.
"I think it is the start of a series but I think Trichet ... will try to temper any market expectations, which are already priced in, of further hikes to come," said Lloyds interest rate strategist Eric Wand.
Bank-to-bank lending rates have already risen on rate hike expectations. The three-month Euribor rate has risen over 25 basis points since the start of the year and hit its the highest level since June 2009 yesterday.
With Greece, Ireland and Portugal all being forced to rely on international bailouts and struggling to generate growth, the rate hike will carry risks. But the ECB believes it can tighten policy slowly enough to avoid doing serious damage.
It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages.
The euro was steady after the decision, which ECB policy makers had flagged heavily in advance. All but four of 80 economists polled by Reuters last week expected a 25 basis-point rise.
The increase in the ECB's benchmark refinancing rate marks a gentle exit from the central bank's policy response to the global financial crisis. It had held the refi rate at a record low 1.0 percent since May 2009.
The ECB also raised its deposit rate by 25 basis points to 0.50 percent, and increased its marginal lending rate by the same amount to 2.0 percent.
"A - no surprise. B - the eurozone economy is strong enough to stand it, and C - it will be a little problem for the eurozone periphery but as long as the eurosystem continues generous emergency assistance for stricken banks in the periphery, the periphery can bear it," said Berenberg Bank economist Holger Schmieding.
The rate decision came less than 24 hours after Portugal announced it was seeking European Union support, a decision long expected by financial markets.
For months the central bank has been privately pushing Lisbon to accept assistance, and the fact it has finally happened may free the ECB to take a firmer line on the budding inflationary risk.
The ECB is concerned that firm oil prices - near 2-1/2 year highs - could boost inflation expectations and financial markets are pricing in two further quarter-point rises in interest rates this year to follow a move yesterday.
But the Frankfurt-based bank must be careful not to hurt the eurozone's struggling economies by jacking up rates fast and Jean-Claude Trichet, who shocked markets last month by signaling an April hike, may not want to heighten expectations for further rises.
"I think it is the start of a series but I think Trichet ... will try to temper any market expectations, which are already priced in, of further hikes to come," said Lloyds interest rate strategist Eric Wand.
Bank-to-bank lending rates have already risen on rate hike expectations. The three-month Euribor rate has risen over 25 basis points since the start of the year and hit its the highest level since June 2009 yesterday.
With Greece, Ireland and Portugal all being forced to rely on international bailouts and struggling to generate growth, the rate hike will carry risks. But the ECB believes it can tighten policy slowly enough to avoid doing serious damage.
It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages.
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