ECB raises interest rates despite debt crisis

AP News
Posted: Apr 07, 2011 8:50 AM
ECB raises interest rates despite debt crisis

European Central Bank President Jean-Claude Trichet is saying Europe faces continuing inflation risks despite the economic difficulties in Portugal, Greece and Ireland.

His comments Thursday came after the bank raised its key rate Thursday by a quarter percentage point to 1.25 percent from 1 percent _ the bank's first increase in nearly three years.

Trichet says inflation risks "remain on the upside" and that the bank would "monitor very closely" future price developments.

The bank must find a compromise between raising rates to prevent inflation as Europe's economy recovers and supporting crisis-hit countries and their banks. Portugal has asked for a financial rescue loan so it can pay its debts. Greece and Ireland have already been bailed out.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

FRANKFURT, Germany (AP) _ The European Central Bank raised its key interest rate by a quarter point Thursday, underlining its determination to fight rising inflation even as several euro member countries struggle with ailing economies and a debt crisis.

The refinancing rate was lifted to 1.25 percent from a record low of 1 percent, where it had been since May 2009, only a day after Portugal asked for an international bailout.

The move highlights the dilemma facing the central bank as it tries to set a single monetary policy for a region that spans 17 different economies.

On the one side, Portugal is set to join Greece and Ireland in taking a rescue package and Spain is struggling with a 20 percent unemployment rate. On the other, countries like Germany are enjoying robust growth, booming exports and falling unemployment.

But because the European Central Bank's mission is to control inflation _ whereas the Federal Reserve also aims to create jobs _ it is tightening rates, even though that will put more pressure on hard-hit consumers with mortgages and the collapsed real estate markets in the so-called peripheral countries.

The ECB is worried that inflation, which hit 2.6 percent in March, will remain stuck above its target of "close to, but just under 2 percent." Critics of a rate hike have noted that inflation has been mainly driven by higher oil and food prices, largely external factors the ECB cannot control through its policies.

Against that backdrop, markets will be watching bank President Jean-Claude Trichet's news conference for clues about how far and how fast the bank raises rates in coming months.

Trichet has said the bank was determined to move pre-emptively to keep higher prices from causing a spiral effect in which higher inflation expectations cause wages to go up, in turn boosting consumer prices further.

Analysts who follow the bank had expected a quarter-point increase, followed by several more by the end of the year.

The ECB is charting a different course from the U.S. Federal Reserve, which has not yet signaled readiness to begin raising rates from the current rock-bottom 0-0.25 percent.

The Bank of England's monetary policy committee left rates untouched at 0.5 percent at its meeting despite rising inflation.