The European Central Bank has kept rates low for almost two years Eurozone interest rates have been raised to 1.25% from the record low of 1% by the European Central Bank (ECB).
Interest rates had been held at 1% for just under two years following the financial crisis and global recession.
The European Commission recently upgraded its inflation forecast for the eurozone to 2.2%, above the ECB target.
However, there are worries that the rate rise will cause more problems for the eurozone’s weaker economies, such as Portugal.
On Wednesday, Portugal asked for financial assistance from the European Union.
“Inflation is above their objective and they are worried it will remain above their target”
Ken Watrett European economist, BNP Paribas
The rise in eurozone interest rates had been widely expected by markets and could mark the start of a series of rate rises by the ECB.
The bank also raised another reference rate – the marginal lending rate – to 2.% and its overnight deposit rate to 0.5%.
Analysts said the European Central Bank was concerned about the impact of rising oil and commodity prices on inflation.
“Inflation is above their objective and they’re worried that it will remain above their target level for quite a long time,” said Ken Watrett, European economist at BNP Paribas.
There is uncertainty, however, about how far rates will rise.
Further rises could risk damaging growth in the eurozone’s weaker economies such as the Republic of Ireland and Portugal.
“I think it is the start of a series but I think [ECB President] Trichet… will try to temper any market expectations, which are already priced in, of further hikes to come,” said Lloyds’ interest rate strategist, Eric Wand.
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