European Central Bank hikes interest rates to 1.5 percent

Vittorio Hernandez – AHN News

Frankfurt, Germany (AHN) – The European Central Bank raised on Thursday key lending rates by a quarter point to 1.5 percent. The rate hike aims to curb inflation, said ECB President Jean-Claude Trichet.

He hinted of more benchmark rate increases in the future, despite weak economic growth in southern Europe and problems in the bond markets. Trichet made the rate hike announcement even if the ECB had been warned that the increase may be bad for the Spanish and Italian economies.



Trichet stressed that all eurozone nations are on the losing end if the regional central bank would fail to rein in price increases through the key lending rate increase. Inflation in the zone hit 2.6 percent in June due to pressure on fuel and food prices.

Following the rate hike announcement, yields on 10-year Italian bonds went up to a high of 5.21 percent, while the Spanish bonds yielded 5.71 percent, but settled down slightly on Thursday
The ECB, however, waived collateral requirements on Portuguese bonds, which would allow the country’s banks to continue tapping the ECB’s liquidity window after Moody’s downgraded Portugal’s debt to junk. The bank had already waived the rules earlier for Greece.

Trichet cautioned eurozone governments against initiating measures that the credit ratings agency may consider a default, which would trigger billions of euro-worth of complex financial instruments such as credit default swaps, and destabilize the European banking sector.

Analysts said that the announcement would increase borrowing costs and make like harder for nationals of several eurozone economies such as Greece, Portugal, Ireland, Italy and Spain – which are all pushing for belt-tightening measures to reduce national budget deficits amid weak economic growth or recession.
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