ECB raises rates for first time since 2008

Eurozone official interest rates have risen for the first time in three years as the European Central Bank reacted to accelerating inflation by tightening policy.

The increase in the ECB’s main interest rate, from 1 per cent to 1.25 per cent, follows a surge in eurozone inflation and increasing confidence at the Frankfurt-based institution that official borrowing costs no longer need to remain at emergency lows.

The move had been widely expected after Jean-Claude Trichet, ECB president, signalled last month that a rise was likely in April. But it is likely to prove controversial, especially coming just hours after Portugal announced it was seeking European Union help with its escalating financial crisis.

Portugal and other eurozone countries worst-hit by the region’s debt crisis – including Spain and Ireland – could be affected by higher official borrowing costs earlier than Germany or France because of the importance of variable mortgages linked to the ECB interest rate.

The ECB last raised its main interest rate in July 2008. Within months, however, it was forced to cut rates faster and further then ever to stave of economic disaster after the collapse of Lehman Brothers investment bank.

Thursday’s move means the ECB has lifted interest rates while the US Federal Reserve continues to add to the support it is providing to the economy via “quantitative easing”. Economists have warned that differences in strategy between the ECB and Fed could have a destabilising impact on global economic prospects if prolonged.

However, the ECB is worried that higher inflation rates caused by rises in oil and commodity prices will become entrenched through higher wages. Thursday’s interest rate rise was intended to make clear its determination to fight price pressures. Eurozone annual inflation, which the ECB aims to keep “below but close” to 2 per cent over the medium term, hit 2.6 per cent in March.

ECB governing council members have also called for the “normalisation” of interest rates, which had been left at the record low of 1 per cent since May 2009, a time when the eurozone economy was in its deepest recession for decades and policymakers feared deflation would wreak further economic damage.

Since then, a robust German industrial recovery has led eurozone economic growth that shows few signs of fizzling out. Ahead of the ECB announcement, official figures showed German industrial production had risen a further 1.6 per cent in February compared with a month earlier. A 2 per cent increase had been recorded in January.

Strong German orders data this week indicated growth in Europe’s largest economy had accelerated sharply in the first quarter of 2011.