European Central Bank Raises Interest Rate Despite Ailing Economies

FRANKFURT, Germany -- European Central Bank President Jean-Claude Trichet is saying Europe faces continuing inflation risks despite the economic difficulties in Portugal, Greece and Ireland.

His comments Thursday came after the bank raised its key rate Thursday by a quarter percentage point to 1.25 percent from 1 percent – the bank's first increase in nearly three years.

Trichet says inflation risks "remain on the upside" and that the bank would "monitor very closely" future price developments.

The bank must find a compromise between raising rates to prevent inflation as Europe's economy recovers and supporting crisis-hit countries and their banks. Portugal has asked for a financial rescue loan so it can pay its debts. Greece and Ireland have already been bailed out.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

FRANKFURT, Germany (AP) – The European Central Bank raised its key interest rate by a quarter point Thursday, underlining its determination to fight rising inflation even as several euro member countries struggle with ailing economies and a debt crisis.

The refinancing rate was lifted to 1.25 percent from a record low of 1 percent, where it had been since May 2009, only a day after Portugal asked for an international bailout.

The move highlights the dilemma facing the central bank as it tries to set a single monetary policy for a region that spans 17 different economies.

On the one side, Portugal is set to join Greece and Ireland in taking a rescue package and Spain is struggling with a 20 percent unemployment rate. On the other, countries like Germany are enjoying robust growth, booming exports and falling unemployment.

But because the European Central Bank's mission is to control inflation – whereas the Federal Reserve also aims to create jobs – it is tightening rates, even though that will put more pressure on hard-hit consumers with mortgages and the collapsed real estate markets in the so-called peripheral countries.

The ECB is worried that inflation, which hit 2.6 percent in March, will remain stuck above its target of "close to, but just under 2 percent." Critics of a rate hike have noted that inflation has been mainly driven by higher oil and food prices, largely external factors the ECB cannot control through its policies.

Against that backdrop, markets will be watching bank President Jean-Claude Trichet's news conference for clues about how far and how fast the bank raises rates in coming months.

Trichet has said the bank was determined to move pre-emptively to keep higher prices from causing a spiral effect in which higher inflation expectations cause wages to go up, in turn boosting consumer prices further.

Analysts who follow the bank had expected a quarter-point increase, followed by several more by the end of the year.

The ECB is charting a different course from the U.S. Federal Reserve, which has not yet signaled readiness to begin raising rates from the current rock-bottom 0-0.25 percent.

The Bank of England's monetary policy committee left rates untouched at 0.5 percent at its meeting despite rising inflation.

Comments

[Kenz300]

08:57 PM on 05/01/2011

High oil prices are a key cause of inflation. Oil price increases impact EVERYTHING.
It takes oil to till a field, plant a crop, harvest it and transport it to market. Oil price inflation is FOOD price inflation.

It takes oil to transport all those goods from China. FedEx, UPS, the airlines and trucks bringing goods to the stores all use oil. Oil price inflation impacts the price of everything that gets transported to the store. That will impact the price of all those goods being delivered.

Those that believe in PEAK OIL theory believe that rising demand from China and India will soon outpace the worlds ability to supply more oil raising the price for all.

If we are concerned about inflation we need to move quickly on developing alternatives for oil and transportation fuels. Second generation biofuels made from algae, cellulose and waste seem to be a possible solution. Waste Management is making both fuel and energy from trash that it is collecting daily. The world produces a lot of trash. It may be time to convert that trash into fuel.

[nogimmicks]

08:31 PM on 04/09/2011

Yes, the interest rates must be much higher. However, it must come together with defaulting on a fake debt of the Americans to the very bankers printing the American dollar. In 2012 the so called budget of the so called Treasury Department is planned to become 0.53 Trillion dollars. If the interest rates are higher we will find ourselves under "obligation" to give the entire US income of 2.3T back to the bankers as interest. That is the hidden problem that nobody wants to mention.

[TheCommons]

06:06 PM on 04/09/2011

Trichet is running a nice lab test for austerity buffs here in the United States. I'm guessing he is going to cripple European recovery, but we'll see. But of course even if that does happen, no Republican politicians in the US would ever acknowledge it.

[Renlim]

03:40 AM on 04/08/2011

Well the European Central Banks Jean-Claude Trichet is a lot smarter then the US Federal Reserves Ben Bernanke and it's greed filled house of cards that continues to inflate the bubble with low interest rates and propping up the Wall Street markets as well printing as much money the printing presses can bare... do not worry about tomorrow... live for today... and dye tomorrow when a small breeze will send the house of cards tumbling down and the sound of that bubble popping...reverberates around the USA.

[lodger16x]

06:44 AM on 04/08/2011

The only problem with printing money is possible inflation. America hasn't had a real inflation problem in decades. There's a little now, largely due to international commodities speculation and America clinging to finite fossil fuels.
Blaming "printing money" for economic problems is a simplistic slogan without basis in fact.

[Renlim]

02:28 PM on 04/08/2011

What you say is true that international commodity speculations increases inflation.. but it is one of many equative elements of the global market place...printing money causes a internal devaluation of a governments currency value which increases cost in conjunction with the cost of commodity.

Yes may comment was simplistic within a singular element of the total spectrum and breakdown of this complex issue...such as yours was. But who would do a dissertational article on a comment board maybe you but not me.

[Duppy]

06:08 PM on 04/07/2011

Inflation is artificial. Juiced up by commodity speculators driving up the price to make a quick buck. That is the extent of inflation. If governments around the world would shut down speculators, the rise in oil/corn etc would fall dramatically.

[LibertyRoy]

03:03 PM on 04/07/2011

A little education for some here.... you are SUPPOSTO raise rates when there is inflation! They only reasons we do not is the myth that keeping them artificially low helps the economy and because if they go up, our debt service explodes. So instead we have gas and food prices rocketing. Folks, that is inflation! We have put ourselves in a corner and there is really no way out.

[kenhamlett]

03:35 PM on 04/07/2011

I am happy to see your comment. I have been writing about this same thing for many months. We are dancing on the lip of a volcano, and no one wants to talk about it -- at least not the people we elect from both parties to run our government. They are currently squabbling over pretty minor matters -- related solely to political philosophy -- while inflation returns and the "fragile recovery" reaches a point near the end of its road. Today, the price of a barrel of oil topped $110 a barrel. That represents a more than 10% increase in less than a month. That will be passed along to consumers sooner, rather than later, on top of the already steep recent increases. With all the commodities inflating in price, we cannot now avoid the inflation cycle, and the Fed will have no choice but to finally raise interest rates. The combination of inflation and higher rates, will choke off our economic growth, and we will be in the soup big time. To face another downturn starting from our present levels of employment and production and our present housing situation will be a disaster. Yet, we continue to squabble about purely partisan things rather than putting them aside long enough to do something to avoid disaster. But, then, that would take leadership in both parties, and though I am a lifelong Democrat, I have not seen much of that in either party of late.

[lodger16x]

06:47 AM on 04/08/2011

The same people whine about the inflation monster tend to be the same people who ridicule the idea of weaning ourselves from fossil fuels.
 Sorry, that doesn't pass the reason test.

[Willowset]

03:37 PM on 04/07/2011

Yes, the U.S. Fed should raise interest rates. But most people do not realize that food and gas are excluded when the media regularly report our country's "low" inflation rates. (Listen for the ways media use the term "core inflation.") Artificially low interest rates are coupled with real inflation -- rising prices on the food and gasoline that take such a large share of whatever money is available to the poor and to the middle class that is rapidly becoming poor.