European Central Bank Raises Interest Rates

Europe’s Central Bank – the equivalent of the U.S. Federal Reserve – announced that it was raising interest rates from 1.0% to 1.25%.  This is the first rise in interest rates by the ECB since July 2008.

Analysis: For me, this is a very clear indication that, at the worldwide political level, the Great Recession is over.  That worldwide gross domestic product (GDP) is on a strong footing.

Only in the situation in which a government was extremely comfortable that its economy was stable could it raise the price of money, or interest rates.  In the heart of a recession such an action would be seen as a brake on economic recovery.

Consider also that Europe’s economy, while large, has very low growth rates.  So only if there was very high confidence on the part of banking officials would they raise interest rates.

This also means that fears of the European debt crisis, as I have been describing on the blog since my 2011 Predictions, are way overblown.  If European officials were worried about the crisis spreading throughout the eurozone and collapsing the entire European economy, why would they raise the cost of troubled nations to refinance their debt?  They wouldn’t.  In other words, the outbreak of budgetary crises in Greece, Ireland, Portugal, Spain, and maybe even Italy, must be seen by the ECB has able to be quarantined and not much of a threat to the wider Union.

That the ECB has raised rates during the Middle Eastern crisis and when Japan is still trying to coordinate its recovery from the tsunami is also an indication that these events are not a threat to European economic growth.  Ergo, they cannot be a threat to a larger, healthier economy like the United States either.

Importance grade: 9; this is a very strong vote of confidence on the part of European officials in the worldwide economic recovery.  I would have rated it a 10 but Europe’s bankers have a knack for being knuckleheads, too.

Jason