The European Central Bank has raised interest rates for the second time this year, increasing them to 1.5 per cent to rein in inflationary pressures.
The move puts the ECB’s target rate three times higher than that of the Bank of England, which today held interest rates at 0.5 per cent amid concerns that the pace of Britain’s economic recovery is slowing.
The ECB’s President Jean-Claude Trichet will give the reasons for the move in a press conference this afternoon. He has previously warned that the bank is determined to prevent rising inflationary expectations from feeding into higher wages and prices.
However, the decision will fan worries about the health of the euro area’s periphery nations, which stand to be plunged deeper into the economic mire by today’s tightening of monetary policy.
The move was clearly signaled in advance of the meeting, with Mr Trichet saying in recent weeks that rate-setters were exercising “strong vigilance” over inflation. The ECB is worried that Germany’s economy, the region’s largest, is so rapidly that if may trigger wage rises and inflame further price pressures.
Advertisement
Earlier the Bank of England’s Monetary Policy Committee voted to keep rates at their record low despite rising inflation squeezing households’ budgets.
Inflation has soared to 4.5 per cent in recent months — more than double the Bank’s 2 per cent target — as a result of the soaring cost of essential items, including food and fuel.
Interest rates have stood at 0.5 per cent since March 2009, when the recession and the threat of deflation prompted central banks around the world to slash rates to record lows.
Since then, the threat of inflation has loomed over the UK’s economic recovery. Consumer prices are rising more than twice as fast as the Bank would like, but it has been reluctant to tighten monetary policy at a time when the Government’s cutbacks are already cramping growth.
After contracting at the end of 2010, the economy has struggled to gather pace. Consumer confidence has tumbled, the labour market is stagnant and house prices are stagnating.
Advertisement
Several well-known retailers, including Oddbins and Habitat, have collapsed in recent months.
The Bank also held its quantitative easing programme at £200 billion. MPC members have been concerned about the strength of the economic recovery in recent months and more signs of a slowdown have emerged since its last meeting a month ago.
At that meeting, the Bank’s nine-member monetary policy committee voted 7-2 to keep rates on hold. Ben Broadbent, who replaced arch-hawk Andrew Sentance, signed up to the majority camp in favour of the status quo.
Minutes to the meeting observed that “the current weakness of demand growth was likely to persist for longer than previously thought”. The Bank will publish minutes of its latest meeting, along with a voting breakdown, in two weeks.