The European Central Bank is raising its main interest rate by a quarter of a percentage point to fight inflation despite the debt problems afflicting Portugal, Greece and Ireland.
The key refinancing rate is going up to 1.25% from a record low of 1% - the bank's first increases since 2008. The move is likely to result in higher mortgage repayments for tens of thousands of home-owners in Ireland.
ECB president Jean-Claude Trichet said the decision to raise rates was unanimous, but he said the bank's Governing Council did not decide that this would be the first in a series of rate rises. He repeated, however, that the ECB would always do what was necessary to keep price stability.
Explaining the decision to reporters, Mr Trichet said the rise in rates was due to the risk of higher inflation, mainly from higher prices for oil and other commodities.
He said it was important that this did not lead to broader inflationary pressures on prices and wages. The ECB has a target of keeping inflation below or close to 2%. The rate was 2.6% in March.
Mr Trichet said euro zone interest rates remained low and were still supporting economic growth and job creation.
Mr Trichet said the latest data pointed to 'continuing positive momentum' in the euro zone economy, though there were high levels of uncertainty about the economic outlook.
Asked whether the interest rate increase would harm Ireland, Mr Trichet said that it is in the interest of all members and partners of the single market with a single currency that we maintain maximum credibility for the anchoring of inflation expectations.
'It is good for the euro area as a whole that we have well-anchored inflation expectations. It is good for confidence, which benefits all including, of course, those who have the most difficulty at present,' he added.
Financial markets are pricing in two further quarter-point rises in interest rates this year to follow today's move.
With Greece, Ireland and Portugal all being forced to rely on international bail-outs and struggling to generate growth, the rate hike will carry risks.
Economists expect further rates rises
KBC Bank economist Austin Hughes said he expected rates to rise to 2% by the end of this year, and estimated that this would knock half a percentage point off Irish economic growth, taking €200-300m out of the economy.
He said ECB rate increases would affect business and consumer sentiment, while borrowers would also reduce spending to cope with expected higher repayments.
Ulster Bank's Simon Barry said the most telling feature of Mr Trichet's remarks was his summary that the ECB 'will continue to monitor very closely all developments with respect to upside risks to price stability'. Mr Barry said the phrase 'very closely' had in the past been used to signal a further rate hike in two months' time. The economist said this meant a June hike was likely.
