Rate hike
July 7, 2011
The European Central Bank raised interest rates for the second time this year on Thursday and signaled further policy tightening to come to tackle inflation despite the eurozone's intensifying debt crisis.
"We will continue to monitor very closely all developments with respect to upside risks to price stability," ECB head Jean-Claude Trichet told a news conference after the bank raised interest rates by 25 basis points to 1.5 percent.
Economists had expected the rise before Thursday's announcement, saying the move also signaled further increases in 2011.
"No surprise at all," said Holger Schmieding, chief European economist at Berenberg Bank, of Thursday's quarter-point rise. He added that the next increase - also 25 basis points to 1.75 percent - would like come in the fourth quarter of this year.
Help for Lisbon, hard line for Greece
Despite the rate hike, Trichet said the ECB would extend a hand to hard-pressed Portugal after ratings agency Moody's downgraded its debt to "junk status" this week, committing to keep providing it with liquidity.
The downgrading has cast new doubt on European efforts to rescue distressed eurozone states without debt restructuring. Trichet said Portuguese debt would be accepted by the ECB as collateral for now - come what may.
"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said.
The ECB has proved a major stumbling block in agreeing to a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a "restricted default," which ratings agencies are threatening to impose.
"We say no to selective defaults and credit events full stop," Trichet said during a barrage of questions on the Greek debt crisis.
Greece's banks are dependent on ECB loans. The ECB has, however, previously ruled out accepting bonds with a default rating as collateral.
To avoid a debt default by Greece, eurozone finance ministers are trying to put together a second international bailout by mid-September. German Finance Minister Wolfgang Schäuble's plan for a private sector "soft debt restructuring," in which investors would exchange Greek bonds for ones with longer maturities, is an important part of the new rescue plan.
Author: Gabriel Borrud (AFP, dpa)
Editor: Martin Kuebler