European Central Bank hikes rates

The European Central Bank delivered its first rate hike since 2008 despite the euro zone’s newest debt woes in a bid to prevent rising inflation pressures from becoming entrenched.

The Frankfurt-based ECB raised its reference rate to 1.25% from 1%, the first hike since July 2008. The central bank also boosted other rates by a quarter point, raising its marginal lending facility rate to 2% and its overnight deposit facility rate to 0.5%.

The rate hike came as European officials wrestled with an ongoing debt crisis that claimed its third victim too, with Portugal following Greece and Ireland in requesting an emergency bailout after its borrowing costs soared to unsustainable levels. 

Traders had anticipated a hike since last month, when it was indicated that the rate-setting Governing Council would watch inflation developments with “strong vigilance,” a term used previously to signal rate hikes. 

Official data showed annual inflation running at 2.6%, topping the ECB’s target of near — but just below — 2%.

A rate hike may exacerbate the region’s long-running sovereign-debt problems. While the euro-zone economy is growing amid an industrial boom in Germany and other core countries, nations on the periphery are struggling with austerity measures designed to bring down huge budget deficits.

Now this act of ECB will act as a Double Sword and at the same time will not have any major impact on the economy, as already the economy is struggling with heavy Debt Burden. Instead of a SOLUTION, this and further rate hikes may turn into a BLOCKADE.