ECB raises interest rate despite debt crisis

European Central Bank President Jean-Claude Trichet is saying Europe faces continuing inflation risks despite the economic difficulties in Portugal, Greece and Ireland.

His comments Thursday came after the bank raised its key rate Thursday by a quarter percentage point to 1.25 per cent from one per cent - the bank's first increase in nearly three years.

Trichet says inflation risks "remain on the upside" and that the bank would "monitor very closely" future price developments.

The bank must find a compromise between raising rates to prevent inflation as Europe's economy recovers and supporting crisis-hit countries and their banks.

Portugal has asked for a financial rescue loan so it can pay its debts. Greece and Ireland have already been bailed out.

Global markets were unfazed Thursday by the rate hike and Portugal's request.

Both pieces of news had been widely predicted, although the timing of Portugal's bailout plea came earlier than anticipated given the country has no government.

There are even hopes that Portugal's long-awaited request may stabilise the situation within the 16-country eurozone for a while as fears of contagion to other countries, such as much bigger Spain, have diminished.

Those hopes have helped support the euro of late alongside the prospect of higher interest rates.

By mid-afternoon London time, the euro was trading 0.3 per cent lower at US$1.4289.

On Wednesday, the euro hit a 15-month high of US$1.4349 on the prediction that the ECB would raise borrowing costs. As a result, the decision to increase the main interest rate to 1.25 per cent caused barely a whimper in the markets.

Higher interest rates would not necessarily mean that the euro would be backed if other central banks were also doing so.

But with the US Federal Reserve showing few signs that it's planning to change tack, the euro has been buoyant against the dollar.

Better-than-expected figures showing weekly jobless claims in the US fell by 10,000 last week to 382,000 are unlikely to lead to much of a change in the Fed's thinking on their own. The monthly payrolls figures are more important when assessing the outlook for US monetary policy.

The response in bond and stock markets over Portugal's bailout request has been equally relaxed. In Portugal, the bailout request has been met with an element of relief and the country's main stock index was up 1.5 per cent, making it the best performer in the eurozone.

"Portugal's bailout appears to have been entirely priced into markets, as there was little reaction to the announcement," said Benjamin Reitzes, an analyst at BMO Capital Markets.

"Attention will now turn entirely to Spain, though the decline in yields and credit default swap spreads so far this year suggest markets aren't concerned about contagion."

Elsewhere in Europe, the FTSE 100 index of leading British shares was up 0.2 per cent at 6,052 after the Bank of England kept its main interest rate unchanged at a record low of 0.5 per cent.

Germany's DAX was 0.3 per cent higher at 7,235 while the CAC-40 in France rose 0.5 per cent to 4,068.

In Asia, Tokyo's Nikkei 225 index rose less than 0.1 per cent to close at 9,590.93 even though the Japanese economy got a boost when the Bank of Japan, in a widely expected decision, kept its key interest rate unchanged at near zero and extended emergency loans to financial institutions affected by the earthquake and tsunami crisis.

Hong Kong's Hang Seng index was marginally down at 24,281.80, while South Korea's Kospi fell 0.2 percent to 2,122.14.

In the US, the Dow Jones industrial average rose initially, but lost ground after news that another 7.4 magnitude earthquake had hit Japan.

At mid-afternoon, the Dow was down 56 points, or 0.4 per cent, to 12,367. The broader S&P 500 fell five points, or 0.4 per cent, to 1,330,and the Nasdaq composite index also fell five points, or 0.2 per cent, to 2,795.

- AP