Despite the struggle of European countries to control their debts, the European Central Bank increased their interest rate by 25%. This is for the purpose of fighting the escalating inflation. Many are questioning whether or not this will soon affect the United States.

If interest rates do go up, they may affect mortgage rates and any interest rates on loans. If interest rates do go up, then you may also see a negative effect on anyone who is trying to get loan approval with bad credit.

After Portugal requested for an international bailout, ECB increased its refinancing rate from 1% to 1.25%. This move shows the problem of the central bank to establish one monetary policy for a region consisting of 17 economies.

Portugal is joining Greece and Ireland in asking for a rescue package. Spain is facing challenges with a high unemployment rate of 20%. On the contrary, Germany is not feeling the struggle of the other countries because of their economic growth, strengthened exports and increasing employment rate.

According to ECB’s president Jean-Claude Trichet, controlling inflation is beneficial for all its member countries including those experiencing financial challenges. The bailout agreement requires that the struggling countries must fix their government funds and find ways to improve their economies.

The increase in interest rates is not final according to Trichet. Its further increase or decrease will be based on the inflation rate in order to stabilize price changes. ECB is worried that inflation rate may remain at its high level of 2.6%. This rate began in March and is far from the bank’s goal of a maximum of 2%. According to critics, increased inflation is caused by the rise in oil and food prices. These are factors that ECB’s policies cannot control because it is external to them. Trichet further added that the ECB is taking pre-cautionary measures to control the increasing prices from affecting wages and price increases.

ECB is tightening their monetary policies even if this puts more pressure on consumers struggling with mortgages in the collapsing real estate market. Many people tend to compare this with the U.S Federal Reserve’s policies and say that the U.S’ policies are more flexible. But, ECB is treading a different path than the U.S Federal Reserve. Unlike ECB, the U.S. Reserve has not yet shown any signs of increasing their rates from the current 0 to 0.25%.

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