Europe is growing faster then the United States and the economies within the euro-zone are lively. This has led to fears of a higher inflation in the near future. The European Central Bank, responding to such concerns, has raised the benchmark interest rate by 25 basis points to 4 per cent - the highest since 2001.
On Wednesday, after monthly meeting of euro-zone finance ministers, ECB announced its decision to increase the ‘key ECB interest rates‘ by a quarter-percentage point. The hike in borrowing costs shall be applicable from 13 June onwards across 13 different countries.
Here is what the statement on bank’s website reads:
This decision was taken in view of the prevailing upside risks to price stability over the medium term that we have identified through both our economic and monetary analyses. Today’s decision will contribute to ensuring that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability.
The ECB had first started hiking interest rates in 2005 and yesterday’s increase means that it has now resorted to this monetary measure eight times since then. In addition, the hike has meant that the interest rates are now at their highest level since August 2001.
Jean-Claude Trichet, President of the ECB, alluded to this fact and said:
What we have been doing since December 2005 has served us very well. We have been fully vindicated.
Trichet said that the interest rate hike is meant to counter inflation, which the bank seeks to peg at 2 per cent in the medium-run. He declined to commit to a timetable, giving rise to doubts that further increase cannot be ruled out.
Even though the move was more or less expected, its timing still surprised many. Several economists believed that the measure would be implemented somewhere around September.
Meanwhile, the announcement had an immediate impact on the stock markets around Europe. Most of the European indices closed down low. The news also saw euro slip down, as the bank did not indicate clearly how much interest rates it was contemplating in future. The euro traded at $1.3495, down a touch from 1.3504 in late New York and pulling further away from a three-week high around $1.3555 hit earlier in the week.
Yesterday’s decision, if anything, has confirmed the degree of seriousness with which the central bankers around the world are viewing the current global economic trends. Their fears about oil prices in particular and the threat of inflation are fanning the interest rate hikes that the economies are witnessing almost every month now.
