Earlier today officials of the European Central Bank met in Frankfurt and decided to raise the benchmark interest rate by 25 basis points to 1.5%, a move expected by the majority of economists. The new mark is the highest interest rate the bank has set in over two years, with March of 2009 the last month at proximate levels. Banking officials cite concern with a disparity between economic recovery — in places like Germany (NYSE:EWG) — and national debt crises (in places like Greece and Portugal) that they believe could contribute to high inflation. The decision to raise interest rates was in the hopes of counteracting inflationary pressures, and it may not be the last rate move we see from the ECB in 2011.
According to Nomura’s Laurent Bilke, “We will see another rate increase before the end of the year because the inflation outlook warrants it. At this level, the impact on the periphery is marginal. That leaves Trichet with the freedom to really draw a line in the sand with governments and remind them that it’s their job to fix the crisis.” The continent will watch nervously as ECB President Trichet addresses the public in a press conference at 2:30 P.M.
Europe’s economic situation continues to grow more precarious after yesterday ratings agency Moody’s (NYSE:MCO) decided to lower credit ratings on Portuguese sovereign debt, sending another wave of default panic through European banks, creditors, and indirectly exposed parties. This news combined with advisement by Moody’s and S&P (NYSE:MHP) that they will cut Greece to ‘default’ if the voluntary rollover plan goes through has swung the continent into what LSE Professor Christopher Pissarides calls, “a more critical phase,” rife with “uncertainty.”
To come out on the right side of this critical turning point, continental leaders will need to reduce debt by cutting government spending and finding ways to boost revenues, and lower fuel prices would also help, say economists.