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First rate rise in three years for ECB

First rate rise in three years for ECB

(8 April 2011 – Europe) For the first time in nearly three years, the European Central Bank (ECB) raised its interest rates on Thursday. The ECB decided to act ahead of its peers, the US Federal Reserve, the Bank of England and the Bank of Japan, increasing its benchmark refinancing rate to 1.25 percent.

This was the first change to the refinancing rate since it was cut to a record low of 1 percent in May 2009.

Inflation is now at 2.6 percent and is likely to climb further above the ECB’s target of 2 percent, meanwhile although inflation has climbed past the central bank’s target in England, the Bank of England (BOE) kept its own rate at a record low of 0.50 percent in a bid to bolster a feeble economy.

ECB president Jean-Claude Trichet said the ECB would continue to monitor very closely all developments with respect to upside risks to price stability, and that despite financial problems in Greece, Ireland and Portugal, market stability was its main priority.

The ECB added that monetary liquidity remains ample and may facilitate the accommodation of price pressures, a warning on inflation that appeared high up in its meeting statement for the first time.

The ECB began its last rate cutting cycle in the global financial turmoil that followed the collapse of US investment bank Lehman Brothers in September 2008, having to lower rates quickly to try and keep the economy afloat.

The ECB now wants to move monetary policy back towards normal and has pressed governments to resolve their chronic solvency problems.

'Strengthened confidence in the sustainability of public finances is key, as this will reduce interest rate risk premia and improve the conditions for sound and sustainable growth,' the ECB statement said.
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