ECB Raises Interest Rates; BoE Benchmarks Unchanged

ECB action expected; firm stance on Greek debt remains

The European Central Bank (ECB) on Thursday raised its interest rates in a move that was broadly expected, while the Bank of England (BoE) left its own rates unchanged, a policy that also was anticipated.

The ECB has not, however, softened its stance on accepting Greek debt as collateral in the event of a default, which is viewed as a means of keeping governments from a downgrade to a default and avoiding the contagion that would follow.

Reuters reported that the increase to 1.5% in the main refinancing rate had been considered a logical result of the ECB's repeated "strong vigilance" message—words that are regarded as code for a coming rate rise. Later in the day, the news service reported that ECB President Jean-Claude Trichet signaled that further rate hikes are likely.

Berenberg economist Holger Schmieding in the report termed the 25-basis-point increase as, "No surprise at all." He went on, "It is appropriate given that the euro zone economy has apparently expanded at a pace slightly above trend in the first half of the year, and given that inflation is above target."

The ECB hiked both subsidiary overnight deposit and borrowing rates together, while leaving its rate "corridor" unchanged for the present. It had little choice on the increase despite Greece's debt woes, since markets would have been spooked by a change in policy after hearing repeated messages to expect the hike.

BoE rates are currently at 0.5%, where they are expected to remain owing to concerns over Britain's poor economy.

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