ECB Follows India, China. Raises Interest Rates

European union flag
Brussels, Apr 8: For the first time in 40 years, the European Central Bank (ECB) lifted interest rates before the Federal Reserve. ECB policy makers meeting in Frankfurt on Thursday raised the benchmark interest rate 25 basis points to 1.25% from a record low of 1%. The step was taken to tackle inflation which has become a major threat to the European economies. Meanwhile Portugal became the third nation to succumb to the region's sovereign debt crisis.

The ECB has joined India, China, Poland and Sweden to raise interest rates, meanwhile Federal Reserve has not given any sign of tightening. Separately, the Bank of England kept its key rate at 0.5% and the Bank of Japan held its benchmark at 0.1%.

Some concerns among experts are that higher borrowing costs may appreciate the Euro and it may increase the severity of the sovereign debt crisis; like Portugal had to follow Greece and Ireland in seeking European Union bailout. A European economist stated, "The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries."

Many analyst consider that there will be a second round of hike in interest rate by June.

Earlier ECB delayed the withdrawal of emergency policy settings that were brought out during the global financial crisis as Europe's debt problems had threatened and it seemed like the 17-nation currency bloc could end.

Countries such as Ireland and Spain are still trying to move past their debt burdens and burst property bubble.

Last year Germany's economy reported expansion of 3.6%,its highest since reunification, twenty years ago. According to ECB's forecast, Euro-area growth will average 1.7% this year and 1.8% in 2012. Inflation is the major concern for the central bank as it raised its head above the comfortable limit of 2% in December and reached 2.6% last month. This was the fastest pace of inflation in the last two years.

OneIndia News

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