The European Central Bank (ECB) raised its main interest rate yesterday for the first time since July 2008 just as Portugal became the latest victim of the eurozone’s deficit and debt crisis.
The increase in the ECB’s benchmark refinancing or “refi” rate to 1.25 percent also marked the first change in either direction since it was cut to a record low of 1.0 percent in May 2009.
With higher inflation and core eurozone economies like those of Austria, France, Germany and the Netherlands demonstrating solid growth, “an interest rate of 1.0 percent is simply too low,” ING senior economist Carsten Brzeski said.
“We all know that it’s the start of a series of rate hikes,” he added, a trend that could make it harder for countries like Portugal, Ireland and Greece to resolve chronic financial problems.
Some economists felt a hike was unwarranted given the difficulties weaker eurozone countries such as Portugal are having in taming their debt and deficit problems.
“Tighter monetary policy will only add to the burden of reeling peripheral countries and increase the risk of a much worse debt crisis,” Ernst & Young senior economist Marie Diron said.
Ben May at Capital Economics agreed, saying a hike could push the euro higher against other major currencies and would “only pile further pressure on the uncompetitive, debt-laden peripheral economies.”
However, Berenberg Bank senior economist Holger Schmieding remained upbeat about the general outlook, saying: “Europe will continue to contain its debt crisis so that it does not derail the overall European recovery.”
“Europe works in its own messy ways, but it is still working so far,” he said.
The Bank of England kept its own key rate at a record low of 0.50 percent yesterday.
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