ECB raises rate

The European Central Bank raised interest rates for the second time in three months on Thursday and signalled a further hike is likely this year to tackle inflation despite the intensifying eurozone debt crisis. The ECB raised its benchmark lending rate to 1.50 percent to contain eurozone inflation that now stands at 2.7 percent, following a rate increase in April which was its first since July 2008.
--- Maintains hard-line stance on Greek debt deal
The ECB also offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, pledging to keep providing it with liquidity regardless of ratings. On Greece's debt troubles, President Jean-Claude Trichet stuck to the bank's view that any rescue should not trigger a default or a payout in credit insurance, a stance that pushes the problem back to governments.
"We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet told a news conference after the bank raised interest rates by 25 basis points to 1.5 percent - its second rise this year. Economists said beforehand that use of that phrase would signal a further rate rise in 2011, likely to be in the last three months of the year.
"Today's news conference has made crystal clear that the ECB remains geared towards further monetary tightening, despite the lingering debt crisis," said ING economist Martin van Vliet. Although financial markets are anxious to know what steps the ECB might take if the eurozone crisis worsens further, Trichet repeatedly refused to discuss them and said he would prefer instead to discuss traditional monetary policy. Leaving the news conference, Trichet said he hoped next month's briefing would focus primarily on monetary policy rather than "other issues".
"We say no to selective default, no to a credit event," Trichet said. Refusing to accept Greek bonds as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek economy and risking contagion to other eurozone economies. Most economists expect the ECB to baulk at that and keep banks afloat somehow. Trichet did, however, in the wake of Moody's Portugal downgrade, join in criticism of the "oligopolistic" role of ratings agencies, saying there way they operated was "not optimal".
Eurozone inflation held at 2.7 percent in June, well above the ECB's target of just under 2 percent and Trichet said the bank's interest rates remained accommodative even after Thursday's increase. The rise in the ECB's benchmark interest rate to 1.5 percent was widely expected after the bank's recent reiterations that it was in "strong vigilance" mode - code traditionally used to signal a hike. It also raised its subsidiary overnight deposit and borrowing rates in unison, opting not to re-widen its so-called rate 'corridor' this time around, a decision, which ensures the rate hike packs its full punch.