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European Central Bank hikes rate
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CBC News- The European Central Bank hiked a key interest rate Thursday, focusing on inflation concerns despite the region's debt crisis.
The ECB raised the rate by a quarter point, to 1.5 per cent, and hinted more increases lie ahead, including one more this year, in order to bring inflation, which is running at 2.7 per cent, back under its target of just below two per cent.
At the same time, the bank agreed to give emergency cash to Portuguese banks, as it has done with Greece and Ireland, despite a downgrade by Moody's of Portugal's bonds to junk status.
It suspended collateral rules, meaning that Portugal's banks can still tap into ECB cash even if Portugal's credit rating is considered below the investment grade required by large, private-sector pension funds.
"That was the right thing to do — but for the ECB, another sign of retreat," said Gabriel Stein, an economist at Lombard Street Research.
Stein said this is the latest example of how the ECB is losing its much-vaunted independence. Previously it had stressed it would not accept bonds below a minimum rating.
"Should, as we think likely, Greece or Portugal default, yet remain in the euro area, it seems just as likely that the ECB will have to accept defaulted bonds as collateral," Stein said.
While acknowledging the risks that higher rates might further curb growth among the highly indebted members of the euro zone and increase the risk of default, Trichet said controlling inflation was the ECB's main job.
More hikes expected
The higher rates are aimed at a potentially overheating economy such as Germany's.
Trichet said the euro zone economy grew overall in the second quarter, though at a slower pace than the 0.8 per cent recorded in the first three months of 2011. He acknowledged uncertainty about the outlook for further growth.
In a media briefing, Trichet said the bank would "monitor very closely" price developments.
He traditionally uses that phrase to indicate that the tightening cycle will continue but that rates would not rise next month.
"A further quarter point rate hike probably in October or November still appears to be the central scenario," said Marc Ostwald, market strategist at Monument Securities.
The ECB rate hike came as banks, insurance companies and other financial institutions held talks in Rome in the latest effort by European governments to get the private sector involved in saving Greece from default.
The ECB has been come under fire for insisting that private sector banks and insurance companies should bear some of the losses in any agreement to ease the terms of Greece's debt.
"An unelected ECB is casting an increasing influence on the burden sharing between the private sector and taxpayers," said Sony Kapoor, managing director of Re-Define, an economic think-tank. "This is problematic."
Even though Greece got a $154 billion bailout package last year, it's going to need more money as it remains effectively locked out of international bond markets by high borrowing rates.
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