The 17 nation shared currency the euro has posted gains in recent trading sessions despite the euro zone’s sovereign debt worries. The main reason behind the appreciation of the euro is the recent interest rate hike by European Central Bank. The central bank has recently increased its key refinancing interest rate from 1 percent to 1.25 percent to tackle rising inflation in the region.

Many analysts believe that ECB move wasn’t suitable under the current economic conditions when Portugal, Greece and Ireland are about to take a rescue package for their bailout and Spain is still struggling with an unemployment rate of 20 percent.

Refinancing interest rate actually is the cost on which the central bank lends money to commercial banks. Thus all the short-term interest rates are derived from the key refinancing rate of the central bank. The increase in refinancing interest rate is a big challenge for the Euro exchange rate as this move will decide the direction of interest rates in the region. High interest rates are very effective to control rising inflation but also slows the economic development as its puts more pressure on consumers with mortgages.

Objective of ECB is to keep the inflation under 2 percent, whereas it has reached 2.6 percent for March. Economists have also widely criticized the ECB move as the increased inflation is not driven by internal factors. In fact, the main reasons behind the rising inflation are soaring oil and food prices, which are increasing globally. Economists believe the changing monetary policy will not control inflation, which is driven by external factors.

On the other hand, Bank of England opted for a status quo regarding its monetary policy and left the key interest rate unchanged from 0.5 percent despite United Kingdom’s high inflation of 4.4 percent.