European Bank Hikes Interest Rate

Yahoo ^ | 06/06/07 | Antje Homburger, Associated Press Writer

[Moonman62]

FRANKFURT, Germany (AP) -- The European Central Bank raised its benchmark rate by a quarter percentage point to 4 percent on Wednesday, its highest level in nearly six years as the economy of the region that shares the euro currency grows at a healthy pace.

The widely expected increase in the cost of borrowing will make everything from mortgages to auto loans more expensive for more than 317 million people in the euro zone, which accounts for more than 15 percent of the world's growth.

The ECB's key rate remains below those of the United States, at 5.25 percent, and Britain, at 5.5 percent.

But with the ECB's key interest rate now at its highest point since September 2001 and inflation within the ECB guidelines, markets and analysts will be seeking guidance about what comes next.

Earlier this week, a poll of 52 financial institutions by Dow Jones Newswires found 33 analysts expecting another ECB increase to 4.25 percent by the end of the third quarter, while 19 expected the rate to stay at 4 percent.

ECB President Jean-Claude Trichet said at a news conference that monetary policy is still "on the accommodative side."

The bank will "continue to monitor closely" all developments to ensure price stability over the medium term, Trichet said. He did not use the term "very closely" -- an apparent suggestion that another hike could be some way off.

In the euro zone, business and consumer confidence have been rising, while growth -- at 3 percent in the first quarter -- is largely keeping pace with last year's levels and unemployment is falling.

The International Monetary Fund said Tuesday that euro-zone interest rates need to rise further to counter a pickup in inflationary pressures as the economy moves "from recovery to upswing."

But in a note on the 13-nation area, the Fund said the degree of tightening needed to tackle inflation is "uncertain." The head of the IMF's European department, Michael Deppler, said there was no need for rates to rise above 4.5 percent this year.

Year-on-year inflation in the euro zone was 1.9 percent in May -- unchanged from the previous two months, and around the ECB's guidelines of just under 2 percent.

That suggests that, beyond Wednesday's increase, the ECB probably will not rush into further increases. Higher interest rates can bolster a currency by making investments denominated in it more attractive.

However, Wednesday's decision had minimal immediate impact on the euro, which bought $1.3513 shortly after the ECB announcement -- slightly lower than the $1.3522 it bought late Tuesday in New York.

[Moonman62]

There must be a global competition to see which central bank can hurt its economy the most.

[RKV]

“the economy of the region that shares the euro currency grows at a healthy pace” ?????

Lets look at 2006 unemployment figures for

France: 9.7%
Italy: 6.9%
Germany: 10.3%

Britain (non-euro): 5.5%
US: 4.6%

And the Euros want to RAISE interest rates? First quarter 2007 is looking a little better, but all results are not in yet. My sense is this is the Euros defending their currency, and it doesn’t bode well for their domestic economies.

ftp://ftp.bls.gov/pub/special.r...abor/flsjec.txt

[Moonman62]

Doesn’t make any sense does it?

[RKV]

Like I said, it appears that they want the euro to rise relative to the dollar. They can buy more things priced in dollars (I would have said oil, but that’s not the case now), and its harder for their domestic economy - i.e. unemployment. Could be they are concerned with inflation, and I am not on top of those figures for Europe.

[Moonman62]

It's really tough on Airbus. They pay for their costs in euros, but they sell their planes in dollars. OPEC gets their revenue in dollars, but they buy most of their stuff in euros. OPEC is very sensitive to the value of the dollar. When it's weak, like in the 1970's, or today under Bush, they find ways to restrain supply in order to jack up the price.

The problem with all central banks is that they blame inflation on the economy, when in fact inflation is caused by the government spending too much money. But even considering flawed central bank theory, I don't see how the economic statistics in Europe justify raising rates. Perhaps they really are attacking the dollar, but if they are they are paying a heavy price for doing so.