The European Central Bank raised its key interest rate to 1.5 percent on Thursday to dampen down inflation, even though the move will add pressure on debt-ridden economies on the fringes of the 17-nation eurozone.
The hike, the second this year, was widely expected in markets as the ECB focuses on its responsibility to get inflation, which is running at 2.7 percent, below its target of just below 2 percent.
Though higher rates may be necessary for a potentially overheating economy like Germany’s, they are likely to add to the growth concerns of some of the eurozone’s more indebted nations, such as Greece and Portugal.
The main focus in the markets will be what ECB president Jean-Claude Trichet says in his upcoming press briefing regarding the outlook for the eurozone economy and Europe’s ongoing debt difficulties.
On the economy, markets will be interested to see if Trichet is as hawkish on inflation as he has been of late. And regarding Europe’s debt crisis, the focus will be on what he says about the situation in Greece and how it affects the ECB itself. The bank has significant exposure to Greek debt since it accepts Athens’ bonds as collateral for loans that help keep the economy afloat.
The ECB has repeatedly insisted that a default on those obligations is out of the question.
“Trichet might give markets some comfort by hinting that the ECB could continue to accept Greek debt as collateral for its loans to commercial banks even if the ratings agencies downgrade it to default status,” said Jennifer McKeown, senior European economist at Capital Economics.
“But he will stress that any roll-over of Greek government debt by the private sector will have to be deemed ‘purely voluntary’ by the ECB itself to gain its seal of approval,” McKeown added.
Earlier in the day, the Bank of England held its base interest rate at an all-time low of 0.5 percent as the tepid economic recovery in Britain continues to outweigh concerns over inflation.
Thursday’s decision by the nine-member Monetary Policy Committee to keep the rate unchanged for the 28th straight month was also anticipated in markets.
Though inflation is running at more than double the Bank’s target of 2 percent at 4.5 percent, the majority of rate-setters think inflation will drop quickly next year as the impact of rising energy costs drops out of annual comparisons.