EUROPE - The European Central Bank (ECB) has increased its interest rate by 25 basis points to 1.25%, the first increase in three years, as industry figures warned it would be the first of many.
The move came only a few hours after Portugal's caretaker government confirmed it would be asking the European Union for monetary support, the third country to do so after Greece and Ireland.
Peter Hensman, global strategist at Newton Investment Management, said ECB president Jean-Claude Trichet had emphasised the importance of maintaining price stability in the medium term and that this justified the strain the rate increase would place on troubled countries on the periphery of the euro-zone.
He added: "Although the ECB president indicated that the Council did not decide this was the start of a series of rate increases, the indication that the ECB sees upside risks to inflation remain indicates that further increases are likely."
Ted Scott, director of global strategy at F&C Asset Management, said the move was as brave as the Bank of England's recent decision to keep interest rates stable in the UK.
"The ECB will be accused of callously endangering economic recovery and making the sovereign debt crisis even more difficult to manage just as a third country seeks a bailout," he said.
Scott emphasised that the increase would hit the periphery countries particularly hard, as many still relied on the ECB for additional funding.
"For them, this is unequivocally bad news, as the cost of borrowing will rise at a time when they desperately need to rebuild their capital strength and inter-bank confidence is so low," he added.
However, Parus Shah, portfolio manager of FF European Special Situations fund, highlighted the positive aspects of the move.
"From a stock-picking point of view, this is important, as it means there are sectors and countries that will do significantly better than others, providing good long and short stock picking ideas," he said.
He said European GDP was currently being underestimated and that weaknesses in certain regions would still be offset by growth in core European countries.