ECB hikes interest rates

@CNNMoney July 7, 2011: 10:04 AM ET
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NEW YORK (CNNMoney) -- The European Central Bank raised its key interest rate Thursday, in a continuing effort to fight inflation.

The ECB's key interest rate is now 1.50%, up from the previous 1.25% rate set in April.

In a press conference following the announcement, ECB President Jean-Claude Trichet said it's of "paramount importance," that the rise in inflation, led by higher energy prices, does not become broad based.

Global investors closely watch the language of central bankers for code words indicating possible changes to monetary policy down the road.

In June, Trichet said he was "strongly vigilant" about inflationary pressures -- which made today's rate hike come as hardly a surprise. Trichet did not repeat that language on Thursday.

At a press conference, reporters pelted him with questions about the debt crisis facing Europe's so-called periphery countries Greece, Ireland, Portugal and Spain.

Higher interest rates make it more expensive for these countries to pay off their debts.

Trichet repeated several times Thursday that the ECB is acting in the best interest of the 330 million people in the euro zone's 17 countries. He believes that keeping inflation under control for the area as a whole is essential to maintaining the ECB's credibility.

Moody's downgrades Portugal

On Tuesday, Moody's downgraded Portugal's long-term debt, and last week, the European Union approved another tranche of bailout funding for Greece.

To help Portugal secure funding, Trichet announced the ECB will bend the rules for the country. Even though Portugal's ratings have fallen to junk status, the ECB will continue to accept its government bonds as collateral for loans, he said.

The ECB gave this same courtesy to Ireland earlier this year, and Greece in 2010.

Central banks of the world's advanced economies have kept interest rates at historic lows since 2008 and 2009, as a way to spur borrowing and spending after the global financial crisis. But recently, rising prices have raised fears that inflation could be starting to take off.

Just last week, the Bank of International Settlements warned central banks that "Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks."

Unlike the U.S. Federal Reserve, the ECB -- which is often much more wary of inflation -- is aggressively trying to nip that in the bud.

The ECB last raised interest rates in April, the first time it had done so since the recession.

Meanwhile, the Bank of England, which also met Thursday, has kept its key interest rate unchanged. To top of page

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