The ECB and Portugal’s financial crises

  • SumoMe

The European Central Bank (ECB) raised interest rates by 25 basis points (bp) to 1.5%, the second time in three months, and raised fears of further possible hike later this year to tackle inflation despite euro zone debt crisis.
The ECB also offered to help Portugal, after ratings agency Moody’s downgraded its debt to junk status, pledging to keep providing it with liquidity regardless of ratings. Sluggish economic growth in Portugal made it difficult for the government to fund its spending, gradually losing its competitiveness. The rise in the ECB’s benchmark interest rate was widely expected after the apex banks’ recent reiterations that it was in “strong vigilance” mode – a term used traditionally to signal possible rate hike.
The ECB also raised its overnight deposit and borrowing rates in unison, opting not to re-widen its rate ‘corridor’ – a decision which ensures the rate hike packs its full punch. Nevertheless, the ECB has pledged to keep liquidity flowing to euro zone banks that require it. Market watchers believe the ECB’s rate hike could further worsen Portugal’s financial crises and other countries with similar economic position, as funds will be high-priced.

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