The European Central Bank yesterday decided to increase again the basic interest rate by 25 basis points to 1.5 per cent.

This is the second rise this year reflecting growing inflation and signalling the gradual end to the low interest rates enjoyed across the euro area in the past years as a result of the recession.

After a long period of historically low rates – one per cent – the ECB last April decided to raise the basic interest rate to 1.25 per cent.

Although initially Maltese banks kept their interest rates unaltered, this second move in a few months could well start pushing the cost of money up, even in Malta, as banks will start incurring more costs to acquire their cash from foreign banks and lending institutions.

European economists were expecting yesterday’s ECB move and are speculating that another rise will be made later this year. In fact, announcing the ECB’s decision in Frankfurt, outgoing ECB president Jean Claude Trichet did not rule out further increases. “We will continue to monitor very closely all developments with respect to upside risks to price stability,” he said.

Eurozone inflation held at 2.7 per cent in June, well above the ECB’s target of just under 2 per cent.

Mr Trichet said monetary policy remained accommodative even after yesterday’s increase. Commenting on the woes affecting the eurozone’s stability, particularly through the difficulties in Portugal and Greece, the ECB’s chief pledged to keep liquidity flowing to eurozone banks that needed it. “Portuguese debt would be accepted by the ECB as collateral for now, come what may,” he said.

Moody’s downgrading, earlier on this week, of Portugal’s credit rating to junk, rattled financial yesterday and cast new doubts on European efforts to rescue distressed eurozone states without debt restructuring.

At the same time, the ECB is proving to be a major stumbling block on an agreement on a second rescue plan for as it threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a “restricted default”, which ratings agencies are threatening to impose.

“We say no to selective default,” Mr Trichet insisted yesterday.

Refusing to accept Greek as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek ­economy and risking ­contagion to other eurozone economies.

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