ECB raises rate to 1.25 percent, bolsters its credibility

The European Central Bank (ECB) has raised interest rates to 1.25 percent from 1.00 percent.

The move was clearly telegraphed by ECB President Jean-Claude Trichet and widely expected by analysts and market participants.

This rate hike came after the ECB kept interest rates at the unprecedented low level of 1.00 percent since May 2009.

The ECB’s mandate is to keep consumer inflation below 2 percent. When inflation exceeded that level in recent readings, the ECB responded by raising interest rates despite the fragile global economic recovery and the euro zone's peripheral sovereign debt woes.

The willingness of the ECB to stick to its inflation target and follow through with the rate hike has bolstered the central bank’s credibility in the eyes of investors, businesses, and consumers – thereby firmly anchoring inflation expectations in the medium and long term.

The next question is what ECB President Jean-Claude Trichet will say about future rate hikes during the ECB press conference (at 8:30 a.m. EST).

Many analysts are expecting him to do what he did in the past – not promise future rate hikes, but nevertheless raise rates gradually for the remainder of 2011.