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Business

ECB raises interest rates for first time since 2008

Text by News Wires

Latest update : 2011-04-07

The European Central Bank has raised interest rates for the first time since the 2008 financial crisis. ECB President Jean-Claude Trichet, pictured, used phrasing at a news conference that suggested the possibility of further hikes.

REUTERS - The European Central Bank raised interest rates for the first time since the 2008 financial crisis on Thursday and signalled it was ready to tighten policy further if needed to check rising prices.

ECB President Jean-Claude Trichet used phrasing at a news conference traditionally seen as associated with further swift hikes, saying the bank’s monetary policy “remains accommodative” and that it will “monitor very closely” price risks.

But he stressed the ECB had not decided that Thursday’s move -- a 25 basis point rise in its main refinancing rate to 1.25 percent—was the first in a series of moves, reassuring markets it was not about to embark on an aggressive tightening policy that could choke the euro zone’s struggling periphery.

In a Reuters poll taken after the news conference, nearly half of the 62 economists surveyed said the ECB would not tighten monetary policy further until July, when it would make another 25 basis point increase to 1.50 percent.

“The ECB rhetoric today is consistent with a further 25 basis point rate increase in the third quarter, with July slightly more likely than September,” Berenberg Bank economist Holger Schmieding said in a research note.

The euro initially dipped against the dollar after Trichet said the ECB did not decide the hike was the first in a series, but later appreciated to trade above $1.43 as markets digested his comments.

Trichet’s reassurance that the ECB had not already decided on a series of hikes this year may reflect the bank’s concern that jacking up borrowing costs too fast would harm those euro zone economies struggling with high debt.

Trichet said the ECB had encouraged Portugal to request an international bailout—a day after its Prime Minister Jose Socrates relented and asked for aid.

Interest rates are low, Trichet said, stressing that the ECB will do what it has to do to keep inflation in check.

“The stance of monetary policy remains accommodative and thereby continues to lend considerable support to economic activity and job creation,” he said, reading out the bank’s post-decision statement at a news conference.

“We will continue to monitor very closely all developments with respect to upside risks to price stability.”

The phrase “monitoring closely” was once seen as a sign the ECB was two months off raising rates while “very closely” meant it was on the cards for the next month. But the phrases and the use of “very” have lost much of their previous significance in recent years.

When pressed on the outlook for interest rates, Trichet said: “We did not decide today that it was the first in a series of interest rate increases.”

Economists looked past the comment that no decision had been taken on further hikes, focusing instead on Trichet’s phrasing as signalling the ECB is ready to raise rates again this year.

“These remarks leave the door open for a follow-up rate hike from the ECB despite Trichet’s insistence that the Governing Council had not decided to carry out a ‘series’ of hikes,” said ABN Amro economist Nick Kounis.

“Our base scenario is that interest rates will rise again in July, but the comments suggest that interest rates could even go up earlier. We expect interest rates to end this year at 1.75 percent,” he added.

FLAGGED

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.

ECB policymakers had flagged the decision heavily in advance and all but four of 80 economists polled by Reuters last week had expected a 25 basis point rise.

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.

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 inflation 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 Thursday’s move.

“The acknowledgment that the ECB did not decide that this is the first of a series of rate increases does little to soften today’s hawkish tone,” Unicredit economist Marco Valli said.
 

Date created : 2011-04-07

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