European Central Bank raises interest rates

Inflation in the eurozone increased from 2.7% in March to 2.8% in April, with prices driven higher by soaring commodity costs.

Overall, the European Union (EU) member states with the lowest annual inflation rates were Ireland, Sweden and the Czech Republic, while the highest were to be found in Romania, Estonia, Bulgaria and Hungary.

Having kept interest rates in the eurozone at 1% for almost two years, the European Central Bank (ECB) increased rates in the region to 1.25% in order to combat inflationary pressures. The ECB is the first of the world’s major central banks to increase interest rates in the wake of the global financial crisis and the move is likely to intensify pressure on debt-laden countries within the eurozone.

The region’s sovereign debt crisis continued to grab the headlines with the news that Portugal had requested financial aid from the European Union and the International Monetary Fund (IMF). Meanwhile, Greece announced a plan to sell €50bn-worth (£44bn) of government-owned assets in order to help satisfy the conditions of its bailout package. Elsewhere, Ireland’s progress on the reduction of its deficit received the backing of the European Commission, the ECB and the IMF.

The IMF also warned that many of Europe’s banks require more substantial capital reserves in order to reduce risks to the global financial system – in particular highlighting certain German, Italian, Portuguese and Spanish banks as potential hazards. During the month, a referendum in Iceland rejected a proposed plan to repay to the UK and Dutch governments money that was lost when Iceland’s banking system collapsed.

The IMF expects the eurozone’s economy to grow by 1.6% during 2011, although it remained downbeat on prospects for debt-ridden countries within the region such as Portugal, Greece and Ireland. The IMF increased its forecast for GDP growth in Germany during 2011 from 2.2% to 2.5%. The eurozone’s trade deficit widened slightly during March, having narrowed unexpectedly during February.

The rate of unemployment in the eurozone remained unchanged at 9.9% during March compared with February. The Netherlands and Austria had the lowest individual rates of unemployment at 4.2% and 4.3% respectively, whereas Spain remained the country with the highest level of unemployment, registering a rate of 20.7%.

During April, the MSCI Europe excluding UK index rose 2.9% while in Germany the DAX index was up by 6.7% and in France the CAC 40 index increased 3%.

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