ECB raises interest rates
Published 07/04/2011 | 15:10
The European Central Bank hiked interest rates for the first time in nearly three years today as Portugal became its latest member to ask for a bail-out.
The ECB increased its base rate to 1.25pc from its record low of 1pc, its first rise since July 2008, as it seeks to combat inflation.
At 2.6pc inflation in the eurozone is only marginally above its 2pc target but economists said the ECB has taken a hard-line over fears the rising cost of oil and commodity prices could lead to higher wage demands, forcing the bloc into a vicious circle.
The hike is likely to prove controversial after Portugal became its latest member to ask for a bail-out, with the stricken economy expected to need about €80bn in the rescue.
Analysts have predicted two more increases to 1.75pc by the end of 2011 as inflation accelerates and Germany's economy booms.
The move is in stark contrast to the UK where the Bank of England opted to leave interest rates at their record low of 0.5pc despite inflation running at 4.4pc - more than double its 2pc target.
Edward Menashy, chief economist at Charles Stanley, said the ECB had raised its rate before the UK because the economic recovery in the UK was still in doubt.
He said: "That UK inflation stands at 4.4pc on the CPI measure, significantly above the inflation rate of 2.6pc in the eurozone, might have suggested that the MPC should raise interest rates first.
"However, the UK is undergoing a harsher fiscal retrenchment than its big euro partners and suffered a surprise contraction in fourth quarter GDP of 0.5pc."