Paul Carrel Frankfurt
THE EUROPEAN Central Bank (ECB) raised interest rates yesterday for the second time this year and signalled further policy tightening ahead to tackle inflation despite the intensifying debt crisis in the euro zone.
But the bank offered help to hard-pressed Portugal after Moody’s Investors Service downgraded its debt to junk status this week, committing to keep providing it with liquidity.
“We will continue to monitor very closely all developments with respect to upside risks to price stability,” ECB president Jean-Claude Trichet said after the bank raised interest rates by 25 basis points to 1.5 percent.
Economists said before the announcement that use of that phrase would signal a further rate rise in 2011, likely in the last quarter. Euro zone inflation held at 2.7 percent last month, well above the ECB’s target of just under 2 percent.
Trichet said monetary policy remained accommodative even after yesterday’s increase.
The rise in the ECB’s benchmark interest rate was widely expected after the bank’s recent reiterations that it was in “strong vigilance” mode.
“It’s no surprise at all,” said Berenberg economist Holger Schmieding of the increase.
The central bank raised its subsidiary overnight deposit and borrowing rates in unison, opting not to re-widen its rate “corridor” this time around.
Recent euro zone data have generally disappointed. The latest industrial orders rose less than expected, while growth in the bloc’s dominant service sector dropped sharply.
The ECB’s key rate is expected to rise once more this year, to 1.75 percent.
The Bank of England kept its rates on hold yesterday.
The downgrading of recently bailed-out Portugal’s credit rating to junk rattled financial markets on Wednesday and cast new doubt on European efforts to rescue distressed euro zone countries without debt restructuring.
The ECB has pledged to keep liquidity flowing to euro zone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral, come what may.
“We have decided to suspend the application of the minimum credit rating threshold… for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government,” Trichet added. “This suspension will be maintained until further notice.”
The ECB has proved a major stumbling block in agreeing a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending in the event of a default. – Reuters