ECB to raise interest rates
European bank expected to announce quarter-point increase
By CFOWorld.co.uk | CFO UK | Published 11:10, 07 April 11
Interest rates are set to rise across Europe from Thursday as the central bank makes a move on monetary policy.
The European Central Bank (ECB) has made no secret of its plan to raise the base rate more than once from its record low 1.0 percent but precise timing on official alterations remain the subject of speculation.
With so much instability in the euro zone of late, the bank has clearly marked its course on monetary policy and a first rise in interest rates since July 2008 is now widely anticipated on Thursday.
The policy making governing council started its meeting at 8 am British time. Its rate decision -- due at 12:45 pm British time -- will come less than 24 hours after Portugal announced it was seeking European Union support, a decision long expected by financial markets.
Lisbon's announcement has not changed market expectations for a rise in rates but ECB president Jean-Claude Trichet's news conference at 1:30 pm will be eyed for signs markets are still justified in expecting more than one further move this year.
For months the central bank has been privately pushing Lisbon to accept assistance and the fact it has finally happened may free the ECB to take a firmer line on the budding inflationary risk.
The ECB is concerned that firm oil prices -- near two and a half-year highs -- could boost inflation expectations and financial markets are pricing in two further quarter-point rises in interest rates this year to follow a move on Thursday.
With Greece, Ireland and Portugal all being forced to rely on international bailouts and struggling to generate growth, the rate hike will carry risks. But the central bank believes it can tighten policy slowly enough to avoid doing serious damage.
It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages. Euro zone inflation rose to 2.6 percent last month, above the ECB's medium-term target of just below 2.0 percent.
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