European Central Bank Raises Rates

By: Dr. Mike Campbell Hot on the heels of the news that Portugal has made a formal approach to the EU for a financial bailout (a move actively encouraged by the ECB President, Jean-Claude Trichet), the European Central Bank has raised its interest rate by 0.25% to 1.25%. The rate hike is the first increase that the ECB has made in almost three years since July 2008.

All of the world’s major central banks adopted a policy of reducing interest rates to stimulate growth during the worst of the global financial recession. The ECB move is the first by a major central bank to increase rates. The reason behind the move is to counter inflationary pressure – without choking off economic growth. The Eurozone consists of 17 member states all using the single currency, so it is not possible to please all members simultaneously. This point was underlined in comments made by Trichet: "The hike is unwelcome for peripheral countries, but arguably the core member states were in need of this move already some time ago. In that sense, the timing of the increase is a balancing act, which is part and parcel of the one-size-fits-all monetary policy."

Trichet's Vague Strategy

Mr Trichet would not be drawn on whether this was the first in a series of rate hikes which would take interest rates up to their more traditional levels. He remarked that the ECB viewed inflationary risk as being on the upside, but pointed out that the bank would be following an accommodative strategy. The EC recently updated its assessment of inflation to 2.2% above the ECB target value.

In a parallel meeting, the Monetary Policy Committee of the Bank of England voted to leave its interest rate untouched at 0.5%.
http://www.dailyforex.com/forex-fundamental-analysis/2011/04/European-Central-Bank-Raises-Rates/7643