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Business

ECB raises rates for the first time in nearly three years

Increasing inflationary pressure in the 17-member eurozone have prompted the European Central bank to raise its refinancing rate despite the burden that will put on some struggling eurozone economies.

Jean-Claude Trichet

The ECB's key mandate is to maintain price stability

The European Central Bank (ECB) announced on Thursday it will raise its key interest rate a quarter of a percentage point to 1.25 percent.

The ECB, however, said it was not necessarily considering more rate hikes. But experts expect further rate rises in the coming months to combat rising inflation because of higher energy costs that are partly due to the unrest in the Arab world.

"We did not decide today that it was the first of series of interest rate increases and we will continue to do in the future what we have done in the past, namely to take the appropriate decisions to deliver price stability," said ECB President Jean-Claude Trichet.

Inflation in the eurozone peaked at a two-year high of 2.6 percent last month, well above the ECB's aim to keep inflation around two percent.

A balancing act

With Portugal joining Greece and Ireland in seeking a financial bailout from the European Union yesterday, the ECB finds itself in a balancing act to avoid damaging already stagnant economies.

"In countries like Germany, where the economy is growing strongly, a rate hike is likely to only have a moderate impact," said ETX Capital senior trader Markus Hubner in an interview with Reuters. "In contrast, countries like Portugal are likely to feel a strong impact."

The increase is the first since 2008, when the ECB held a record low refinancing rate of one percent in response to the global financial crisis. It makes the ECB the first major central bank to raise interest rates since then.

In Britain, the Bank of England opted to hold interest rates at 0.5 percent despite pressure to curb inflation. The inflation rate for February in Britain was 4.4 percent, more than twice the Bank of England’s target of 2 percent.

However, raising the cost of borrowing could further hamper an already struggling economy.

Author: Christian Nathler (Reuters, AFP)
Editor: Nicole Goebel

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