After maintaining them unchanged for almost two years at historically low levels, Governing Council of the ECB decided to increase key interest rates by 25 basis points. The operation to be settled on 13 April 2011. The adjustment of the current very accommodative monetary policy stance is warranted in the light of upside risks to price stability.

 Currently, inflation in the euro area has picked up, however price pressures remain subdued. The main reason for the acceleration of inflation in recent months on euro area is higher commodity prices, whereas domestically-generated inflation pressures remain subdued, according to the Quarterly Report. The Report also welcomes the recent milestones in strengthening the economic governance in the euro area as decisive steps to safeguard the financial stability and restore confidence among market participants. It also states that the response to the crisis agreed at the European Council on 24 March represents a systemic overhaul of European economic policy, with the creation of the European Stability Mechanism (ESM) and the Euro Plus Pact.

With regard to price developments, euro area annual HICP inflation was 2.6% in March 2011, according to Eurostat’s flash estimate, after 2.4 % in February. The increase in inflation rates in early 2011 largely reflects higher commodity prices. Bearing in mind these inflation leves, the Govening Council of the ECB decided to take the following monetary policy decisions:

• The interest rate on the main refinancing operations of the Eurosystem will be increased by 25 basis points to 1.25%.
• The interest rate on the marginal lending facility will be increased by 25 basis points to 2.00%.
• The interest rate on the deposit facility will be increased by 25 basis points to 0.50%.

Jean-Claude Trichet, President of the ECB explained that the Governing Council is of the view that “the package of six legislative proposals on economic governance, adopted by the European Council at its summit on 24-25 March 2011, goes to improving economic and budgetary surveillance in the euro area”. Nonetheless,  the proposals fall short of the necessary quantum leap in the surveillance of the euro area “which is needed to ensure the smooth functioning of Economic and Monetary Union”. Therefore, the Governing Council also requested the ECOFIN Council, the European Parliament and the Commission to agree, in the context of their “trialogue”, on more stringent requirements, more automaticity in the procedures and a clearer focus on the most vulnerable countries with losses in competitiveness. According to the ECB, all this would help to ensure that the new framework is effective in the long run.