In an apparent effort to check the rising inflation, the European Central Bank (ECB) raised its interest rate to 1.25% from 1%, the first increase by the ECB since 2008. Addressing a press conference following the decision, ECB President Jean-Claude Trichet said the hike was necessary to "firmly anchor" rising prices. He added that despite the hike, interest rates are still low, "very accommodative" and will boost further economic growth.
The interest rate hike should not come as a surprise to anyone as Trichet had been hinting at it for quite some time now but the move is definitely significant as it is the first interest rate hike by a major central bank in a developed economy since the recession. The Central banks around the world have tried to maintain their interest rates at historic lows since 2008 and 2009 despite the economic crisis. Low interest rates often stimulate business and consumer spending, which in turn spur the economic growth. But the rising energy and food prices have increased inflation across the Europe and the bankers were concerned that rising inflation could become unwieldy at a time when the economy is still to get robust.
Trichet added that the ECB did not send a signal to the Fed by increasing the rates. He noted that it was done only to address the regional needs of the European Union. "On both sides of the Atlantic, we have enormous responsibilities," Trichet said. "We never had the sentiment to be a follower. We do not have the sentiment to be the leader. We do what we have to do, and what is important is that we give a benchmark."
