Thursday, July 7, 2011

ECB Raises Rate to the Highest Level Since Level Since March 2009

The European Central Bank increased their benchmark interest rate by 25 basis points to 1.5 percent. The move was expected, as the central bank  battles steadily increasing price inflation in the eurozone. That said, the rate hike is quite remarkable given the PIIGS crisis, as the hike will make borrowing even more expensive for the PIIGS.

Slowed money growth policy is always a plus, however, the pressure on the ECB to print money and buy up PIIGS debt will intensify. Will the ECB crack under the pressure, especially when current Italian central bank president Mario Draghi becomes ECB president in November, or will the bank stay steadfast in its prudent monetary course? The answer is unclear.

If the bank refuses to bailout the PIIGS, default or a departure from the eurozone may be the only option for many of the PIIGS.

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