BLBG: ECB Raises Key Interest Rate to 1.25% to Stem Faster Inflation
The European Central Bank lifted interest rates for the first time in almost three years to quell inflation even as Portugal became the third nation to succumb to the region’s sovereign debt crisis.
ECB policy makers meeting in Frankfurt today raised the benchmark interest rate to 1.25 percent from a record low of 1 percent, as predicted by all 57 economists in a Bloomberg News survey. It also raised the marginal lending rate to 2 percent from 1.75 percent and increased the deposit rate to 0.5 percent from 0.25 percent, maintaining 75 basis-point corridors either side of the benchmark.
While ECB President Jean-Claude Trichet said last month that a move today is “certainly not the start of a series,” investors expect two more increases to 1.75 percent by the end of the year as inflation accelerates and Germany’s economy booms. The risk is that higher borrowing costs may boost the euro and exacerbate the sovereign debt crisis, which last night forced Portugal to follow Greece and Ireland in seeking a European Union bailout.
“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “The rate increase is appropriate and there will be another one as early as June.”
Press Conference
The euro eased to $1.4270 after the decision from $1.4281 beforehand. Trichet holds a press conference at 2:30 p.m. in Frankfurt. Separately, the Bank of England kept its key rate at 0.5 percent and the Bank of Japan held its benchmark at 0.1 percent.
The ECB is joining China, India, Poland and Sweden in raising interest rates even as the Federal Reserve remains reluctant to tighten amid divisions among its policy makers.
Today’s ECB rate increase is the first since July 2008 and also the first time in 40 years that Europe’s benchmark has risen before the U.S. equivalent.
The ECB has repeatedly been forced to delay the withdrawal of emergency policy settings put in place during the global financial crisis as Europe’s debt woes threatened to tear the 17-nation currency bloc apart.
While nations such as Ireland and Spain are still buckling under debt burdens and burst property bubbles, Germany’s economy last year expanded 3.6 percent, the most since reunification two decades ago, and on aggregate the region has returned to health.
Euro-area growth will average 1.7 percent this year and 1.8 percent in 2012, according to ECB forecasts.
Inflation
The central bank’s primary concern is inflation, which breached its 2 percent limit in December and accelerated to 2.6 percent last month, the fastest pace in more than two years. Producer prices rose an annual 6.6 percent in February, increasing pressure on companies to pass on higher costs to households.
While policy makers acknowledge that surging energy and food prices are largely to blame, they’re worried that workers will demand higher wages in compensation, entrenching faster inflation.
The ECB “will hike twice in quick succession in April and June to satisfy the core economies’ demand for tighter policy,” said Stuart Thomson, a Glasgow-based money manager at Ignis Asset Management, which oversees about $120 billion. “But the sensitivity of the peripheral economies to higher rates, both in terms of overall debt and proportion of consumer loans tied to variable interest rates, means the central bank will pause over the summer.”
Home Ownership
Households in debt-stricken economies stand to suffer more from higher borrowing costs than those in stronger nations. More than 83 percent of homes in Spain are owned, twice the share in Germany, and two out of five are burdened with an outstanding mortgage or housing loan, Eurostat data show.
Variable-rate mortgages account for almost 100 percent of new lending in Portugal and about 85 percent in Spain, compared with 15 percent in Germany, according to the Brussels-based European Mortgage Federation. In Ireland, 85 percent of outstanding loans have flexible rates.
The prospect of higher interest rates may also drive the euro higher, denting export returns for nations like Germany which rely on foreign sales to fuel economic growth.
The euro has already appreciated 7 percent against the dollar this year to more than $1.43 yesterday, a 14-month high. Euro-area manufacturing growth slowed in March and economic confidence fell, signaling the recovery in some countries may have peaked.
Far From Restrictive
Still, the ECB is unlikely to move at a speed that will choke economic growth, according to Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about 16 billion euros ($22.9 billion).
“Even if the ECB hikes as much as expected this year, inflation rates will remain higher than interest rates,” he said. “That’s still a far cry from being restrictive.”
The ECB has also said it will keep providing banks with as much liquidity as they need at least through the second quarter, and has left its bond-purchase program in place.
When Trichet kicked off the last tightening cycle in December 2005, he said “we have not taken any ex-ante decision to embark on a series of interest-rate increases.” The central bank went on to lift its key rate from 2 percent to 4.25 percent.
This time around, “I don’t think it’s one and done,” said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. “They will continue to raise rates, but I don’t think it will be a very aggressive tightening cycle.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
The European Central Bank lifted interest rates for the first time in almost three years to quell inflation even as Portugal became the third nation to succumb to the region’s sovereign debt crisis.
ECB policy makers meeting in Frankfurt today raised the benchmark interest rate to 1.25 percent from a record low of 1 percent, as predicted by all 57 economists in a Bloomberg News survey. It also raised the marginal lending rate to 2 percent from 1.75 percent and increased the deposit rate to 0.5 percent from 0.25 percent, maintaining 75 basis-point corridors either side of the benchmark.
While ECB President Jean-Claude Trichet said last month that a move today is “certainly not the start of a series,” investors expect two more increases to 1.75 percent by the end of the year as inflation accelerates and Germany’s economy booms. The risk is that higher borrowing costs may boost the euro and exacerbate the sovereign debt crisis, which last night forced Portugal to follow Greece and Ireland in seeking a European Union bailout.
“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “The rate increase is appropriate and there will be another one as early as June.”
Press Conference
The euro eased to $1.4270 after the decision from $1.4281 beforehand. Trichet holds a press conference at 2:30 p.m. in Frankfurt. Separately, the Bank of England kept its key rate at 0.5 percent and the Bank of Japan held its benchmark at 0.1 percent.
The ECB is joining China, India, Poland and Sweden in raising interest rates even as the Federal Reserve remains reluctant to tighten amid divisions among its policy makers.
Today’s ECB rate increase is the first since July 2008 and also the first time in 40 years that Europe’s benchmark has risen before the U.S. equivalent.
The ECB has repeatedly been forced to delay the withdrawal of emergency policy settings put in place during the global financial crisis as Europe’s debt woes threatened to tear the 17-nation currency bloc apart.
While nations such as Ireland and Spain are still buckling under debt burdens and burst property bubbles, Germany’s economy last year expanded 3.6 percent, the most since reunification two decades ago, and on aggregate the region has returned to health.
Euro-area growth will average 1.7 percent this year and 1.8 percent in 2012, according to ECB forecasts.
Inflation
The central bank’s primary concern is inflation, which breached its 2 percent limit in December and accelerated to 2.6 percent last month, the fastest pace in more than two years. Producer prices rose an annual 6.6 percent in February, increasing pressure on companies to pass on higher costs to households.
While policy makers acknowledge that surging energy and food prices are largely to blame, they’re worried that workers will demand higher wages in compensation, entrenching faster inflation.
The ECB “will hike twice in quick succession in April and June to satisfy the core economies’ demand for tighter policy,” said Stuart Thomson, a Glasgow-based money manager at Ignis Asset Management, which oversees about $120 billion. “But the sensitivity of the peripheral economies to higher rates, both in terms of overall debt and proportion of consumer loans tied to variable interest rates, means the central bank will pause over the summer.”
Home Ownership
Households in debt-stricken economies stand to suffer more from higher borrowing costs than those in stronger nations. More than 83 percent of homes in Spain are owned, twice the share in Germany, and two out of five are burdened with an outstanding mortgage or housing loan, Eurostat data show.
Variable-rate mortgages account for almost 100 percent of new lending in Portugal and about 85 percent in Spain, compared with 15 percent in Germany, according to the Brussels-based European Mortgage Federation. In Ireland, 85 percent of outstanding loans have flexible rates.
The prospect of higher interest rates may also drive the euro higher, denting export returns for nations like Germany which rely on foreign sales to fuel economic growth.
The euro has already appreciated 7 percent against the dollar this year to more than $1.43 yesterday, a 14-month high. Euro-area manufacturing growth slowed in March and economic confidence fell, signaling the recovery in some countries may have peaked.
Far From Restrictive
Still, the ECB is unlikely to move at a speed that will choke economic growth, according to Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about 16 billion euros ($22.9 billion).
“Even if the ECB hikes as much as expected this year, inflation rates will remain higher than interest rates,” he said. “That’s still a far cry from being restrictive.”
The ECB has also said it will keep providing banks with as much liquidity as they need at least through the second quarter, and has left its bond-purchase program in place.
When Trichet kicked off the last tightening cycle in December 2005, he said “we have not taken any ex-ante decision to embark on a series of interest-rate increases.” The central bank went on to lift its key rate from 2 percent to 4.25 percent.
This time around, “I don’t think it’s one and done,” said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. “They will continue to raise rates, but I don’t think it will be a very aggressive tightening cycle.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
