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ECB to hike rates despite Portugal aid request

ECB to hike rates despite Portugal aid request

April 7th, 2011 by DAVID McHUGH, AP Business Writer in News

FRANKFURT, Germany (AP) - The European Central Bank is widely expected to raise interest rates on Thursday, a day after Portugal asked for a bailout, with markets waiting for clues about how far and how fast the bank will tighten rates as it tries to ward off inflation.

Bank President Jean-Claude Trichet will likely be quizzed about his views on Portugal's request for financial help with its troubled government finances. Markets had largely expected Portugal to need help with its debt pile, but the request came sooner than many expected, given that the country does not have a government.

Economists think that a rate increase this month is a near-certainty after Trichet's statement at a March meeting saying that the bank would use "strong vigilance" against an inflationary spiral.

Eurozone inflation hit 2.6 percent in March, above the bank's goal of just under 2 percent.

The bank's refinancing rate, which determines the cost of short-term credit to commercial banks, has stood at 1 percent since May 2009 - a record low intended to see Europe through the recession resulting from the global financial turmoil that began in 2007.

Trichet's post-decision news conference will be scrutinized for any indication about how far the bank intends to go as it seeks to prevent rising food and energy prices from being built into wages and prices in an inflationary spiral.

Analysts who follow the bank expect a quarter-point increase, followed by several more by the end of the year.

The bank faces the challenge of seeking to guard its credibility as an inflation fighter, while juggling the impact of higher borrowing costs on a continent still dealing with a government debt crisis. Greece and Ireland have already needed bailouts to avoid bankruptcy, and many expect Portugal to need a financial lifeline soon. Turmoil in Libya and the wider Arab world, along with the earthquake, tsunami and damaged nuclear reactors in Japan add further uncertainty.

Higher rates ward off inflation, but can hold back growth if done at the wrong time. As the monetary authority for the euro, the bank must find one rate that suits all 17 member countries. That includes the economies in Ireland and Greece, severely damaged by the debt crisis, as well as in Spain, which is still feeling the collapse of its real estate boom and has an unemployment rate of 20 percent.

That sharply contrasts with Germany, Europe's biggest economy, where the export-driven economy is swiftly recovering, with the unemployment rate dropping to 7.6 percent in March. In the southwestern state of Baden-Wuerttemberg - an industrial powerhouse home to Porsche, Daimler and dozens of smaller firms - unemployment is even down to only 4.4 percent.

The ECB is charting a different course from the U.S. Federal Reserve, which has not yet signaled readiness to begin raising rates from the current rock-bottom 0-0.25 percent.

The Bank of England's monetary policy committee will announce results of its meeting as well but no rate increase is expected.

Expectations of higher interest rates in the eurozone sent the shared currency higher against the dollar Wednesday, to $1.4332. Higher interest rates make a currency more attractive to investors by increasing yield on investments.