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ECB delivers rate hike despite debt, growth concerns

Business Materials 7 July 2011 16:47
The European Central Bank (ECB) delivered its second rate hike in four months on Thursday despite renewed concerns about the debt crisis gripping parts of the 17-member eurozone and signs of slowing economic growth.
ECB delivers rate hike despite debt, growth concerns

The European Central Bank (ECB) delivered its second rate hike in four months on Thursday despite renewed concerns about the debt crisis gripping parts of the 17-member eurozone and signs of slowing economic growth, DPA reported.

The ECB followed up its 25-basis-point increase in borrowing costs in April by announcing another 25-basis points rise after a meeting of its 23-strong rate-setting council in Frankfurt.

The move raised the cost of money in the currency bloc to 1.5 per cent.

But overhanging the meeting were renewed tensions about the debt crisis that has engulfed several eurozone states including Portugal and Greece following negative reports by international rating agencies.

As a result, along with the ECB's plans for interest rates in the coming months, bank President Jean-Claude Trichet is likely to again face a barrage of questions at his regular press conference set down for later Thursday on the Greek debt crisis.

On Tuesday Moody's Investors Service downgraded Portugal's sovereign debt rating to junk status saying Lisbon would probably not meet its debt reduction targets and consequently, like Greece, require a second bailout.

This follows the New York credit rating agency Standard & Poor's announcement on Monday that a plan proposed by French and German banks to roll over Greek debt could trigger a selective default for Greece.

The S&P statement raises the question of whether Greek debt could be rejected as backing for ECB loans and possibly spark a banking crisis in the heavily-indebted nation.

Greece's banks are dependent on ECB loans. The ECB has, however, previously ruled out accepting bonds with a default rating as collateral.

Financial markets are likely to follow Trichet's press conference closely for hints about the ECB's interest rate policy will unfold in the coming months.

At 2.7 per cent, annual eurozone inflation currently stands well above the ECB's 2-per-cent limit.

But beyond this week's widely expected rate rise, slowing growth and the eurozone debt crisis mean that analysts are divided on the prospects for borrowing costs in the eurozone.

Many analysts see rates climbing to between 2 and 2.5 per cent by the middle of next year as the ECB presses on with its rate-hiking cycle.

Some analysts, however, have doubts about how aggressive the ECB can be in hiking rates.

The ECB's latest staff projections also point to consumer prices edging up to 2.3 per cent this year before sliding back to 1.7 per cent in 2012.

This would bring consumer prices down to essentially in line with the ECB's target of close to but below 2 per cent.

Thursday's meeting of the ECB governing council also followed a series of central bank meetings around this world week.

Ahead of the ECB meeting Sweden's Riksbank raised its benchmark rate from 1.75 per cent to 2 per cent while China increased borrowing costs for the third time this year.

Like the Reserve Bank of Australia, which left its benchmark interest rate unchanged Tuesday, the Bank of England also kept rates on hold Thursday at an historic low of 0.5 per cent and left its asset purchase target at 200 billion pounds (320 billion dollars).

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