Brussels, 07/07/2011 (Agence Europe) - On Thursday 7 July, the European Central Bank's Governing Council unanimously decided to raise the main euro refinancing interest rate by 25 base points to 1.50%, increasing the marginal loan facility by 0.25% (to 2.25%) and the deposit facility by 0.25% to 0.75%. This interest rate rise was expected by the markets and is the second rise since the outbreak of the economic crisis in 2008, following an initial eurozone interest rate rise in April 2011 (see EUROPE 10354).
President of the ECB, Jean-Claude Trichet, said: “Our decision will contribute to keeping inflation expectations in the euro area firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term.” Eurostat says annual inflation in the eurozone stood at 2.7% last month. Over the next few months inflation is expected to be well above 2% due to energy and commodity price hikes, explained Trichet, denying rumours that the Governing Council had already arranged to raise interest rates again at the end of the year. Commenting on the potential negative impact of the rate rise on countries on the edges of the eurozone, Trichet said price stability was “essential” for all 17 eurozone economies.
Sovereign debt crisis. Jean-Claude Trichet urged member states to consolidate their public finances and introduce tough structural reforms, saying: “Measures which enhance wage flexibility, such as the elimination of automatic wage indexation, would help to accomplish the necessary adjustment.” He said that pledges made in the excess deficit proceeding must be respected and three countries - Greece, Ireland and Portugal - must meet the commitments made in their structural adjustment programmes. He said it would be better to introduce the necessary reforms ahead of deadline as this would generate results by stimulating growth and job creation. Trichet said that Portugal's decision to privatise state assets not included in its structural adjustment programme was a positive move.
Faced with a battery of questions about the private sector's contribution to the latest Greek bailout currently being negotiated, the ECB president said: “We say no to selective default or credit event.” He urged the EU to stand by “international doctrine” in this domain, namely the IMF's line whereby strict conditions must be attached to any financial aid package to ensure the country in question is able to raise cash from the money markets itself, and private sector involvement should a priori not be considered, although it might be possible in certain cases.
Trichet refused to comment on the sudden downgrading of Portugal by rating agency Moody's (see EUROPE 10411), but criticised the pro-cyclical manner in which financial rating agencies operate, and the oligopolistic structure of the international ratings market. Two issues which will be dealt with by the IMF's Financial Stability Committee. Asked about the solution to the sovereign debt crisis, Trichet said that firstly the Stability and Growth Pact needed to be strengthened, moving beyond what is authorised by the Lisbon Treaty, followed in the near future by considering how to ensure greater budget integration. (M.B./transl.fl)