ECB rate hike piles pressure on periphery

Julian Harris
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FEARS for the Eurozone’s struggling peripheral nations were heightened yesterday, after the European Central Bank hiked interest rates by one quarter of a per cent.

“Even a small rise in rates – and its effect in supporting the euro exchange rate – will only pile further pressure on the uncompetitive, debt-laden peripheral economies,” commented Ben May of Capital Economics.

The potential hit to the weaker Eurozone states was reflected in a poll of Irish businesses. Almost three-quarters (73 per cent) expect to be hurt by higher rates, a survey by KBC Bank and Chartered Accountants of Ireland revealed yesterday.

Monetary policy “remains accommodative,” ECB president Trichet said yesterday, stressing that the Bank will “monitor very closely” price risks.

However, Trichet said hiking the main refinancing rate to 1.25 per cent was not necessarily “a first in the series.” Rates had been at their historic low of one per cent for close to two years, and were widely anticipated to rise at yesterday’s meeting.

The euro initially dipped against the dollar after Trichet’s comments, yet subsequently recovered

“There is increasing risk that the ECB might go with the next 0.25 per cent hike before July and that further rate hikes might follow in the reminder of the year,” commented Citigroup economist Jürgen Michels.

Consumer price inflation is running at 2.6 per cent across the single currency area, while core economies such as in Germany and France are recovering strongly.