European Central Bank Raises Rates as Expected

FRANKFURT — The European Central Bank raised its benchmark interest rate Thursday for the second time this year, as expected, continuing to nudge the cost of money back to precrisis levels, despite heightened fears about Greek debt.

The E.C.B. raised its key interest rate to 1.5 percent from 1.25 percent, where it had been since April. Jean-Claude Trichet, the E.C.B. president, had signaled last month that a rate increase was likely at the monetary policy meeting this month.

Mr. Trichet was scheduled to give a news conference later Thursday, and analysts and investors were expected to be listening closely for indications of how quickly the E.C.B. might adjust rates in the future.

Mr. Trichet was also expected to face many questions about how the E.C.B. might react to plans by European governments to get private investors to share in the cost of Greek debt relief. The rating agency Standard Poor’s warned Monday that a French plan for private sector involvement might be considered a default, an event that could shake the European banking system and impair the E.C.B.’s own substantial holdings of Greek debt.

Economists at Nomura International forecast that the E.C.B. would raise the benchmark interest rate a quarter point again in October and then about every three months next year. That would raise the rate to 2.75 percent by the end of 2012, its highest level since 2008, before the collapse of the investment bank Lehman Brothers prompted the E.C.B. and other central banks to take emergency measures to stabilize the global financial system.

However, the E.C.B., which has sworn to make price stability its main priority, could raise rates more gradually if there are signs that inflation pressures are easing or that the euro area is growing more slowly. Inflation for the past several months has been above the E.C.B. target of about 2 percent.

“We think Mr. Trichet will stick with last month’s line that the recovery is continuing, ‘albeit at a slower pace,”’ Jens Sondergaard, senior European economist at Nomura, said in a note Tuesday. “But the tone of the press conference will be carefully scrutinized for signs of less hawkish rhetoric.”

Many economists say the E.C.B. is wrong to raise rates when there are signs that European growth is slowing and the debt crisis continues to cast a shadow over the euro.

“We think that now is not the time to raise rates,” Marie Diron, an economist who advises the consulting firm Ernst Young, said Wednesday in a note. “With the specter of a disorderly restructuring of Greek debt looming over the euro zone’s future, the risks to the growth (and hence inflation) outlook are so skewed to the downside, that prudent monetary policy management would suggest waiting before raising rates.”

At the news conference, Mr. Trichet was expected to be asked about the E.C.B.’s standoff with European governments on how to deal with Greek debt. Germany and other countries are insisting that banks contribute to Greek debt relief, but the E.C.B. has refused to consider any plan that it is not voluntary.

Standard Poor’s indicated Monday that it would be difficult, if not impossible, for governments to design a plan for private sector participation that would not be considered a default.

The E.C.B. and national central banks in the euro area, which together make up the so-called Eurosystem, have become the largest holders of Greek bonds. Analysts say that the Eurosystem could absorb the losses of a Greek default but that such an event would be a blow to the E.C.B.’s prestige.

HSBC estimates the potential losses to the Eurosystem at €23 billion, or $33 billion. “The ECB’s potential reputational loss is the true issue,” Astrid Schilo, senior European economist at HSBC in London, said in a note.

In addition, even a short-lived, controlled default would raise questions about whether the E.C.B. could continue to accept Greek bonds as collateral for short-term loans. Without access to E.C.B. funding, Greek banks would probably collapse.

Mr. Trichet does not like to respond to hypothetical questions and was thought unlikely to offer much insight into how the E.C.B. would respond to such a situation.

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