European central bank raises interest rates

The European Central Bank lifted interest rates for the first time in almost three years to quell inflation even as Portugal became the third nation to succumb to the region’s sovereign debt crisis.

ECB policy makers meeting in Frankfurt today raised the benchmark interest rate to 1.25 percent from a record low of 1 percent, as predicted by all 57 economists in a Bloomberg News survey. It also raised the marginal lending rate to 2 percent from 1.75 percent and increased the deposit rate to 0.5 percent from 0.25 percent, maintaining 75 basis-point corridors either side of the benchmark.

While ECB President Jean-Claude Trichet said last month that a move today is “certainly not the start of a series,” investors expect two more increases to 1.75 percent by the end of the year as inflation accelerates and Germany’s economy booms. The risk is that higher borrowing costs may boost the euro and exacerbate the sovereign debt crisis, which last night forced Portugal to follow Greece and Ireland in seeking a European Union bailout.

“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “The rate increase is appropriate and there will be another one as early as June.”

Source: Bloomberg