The European Central Bank (ECB) raised its main policy interest rate (refinancing rate) today, from 1% to 1.25% in an effort to combat the threat of future inflation pressures. It represents the ECB’s first policy rate change since June 2009 and the first increase since October 2008. Back in the UK, however, the Bank of England (BoE) left interest rates on hold at 0.5% for the 25th consecutive month.. …
Azad Zangana – European economist Schroders
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– The European Central Bank has concerns about higher food and energy prices feeding into broad-based inflation pressures, but wage inflation in particular
– The Bank of England remains on hold for the 25th consecutive month, perhaps waiting for the impact of higher national insurance to come through
– Just as the ECB’s actions increase the pressure on peripheral countries, Portugal has finally yielded to market pressure, requesting aid
– This is the first step in the rate hiking cycle, but the ECB may have to wait for the UK and US before moving more significantly
In contrast to the ECB, the BoE tends to look through short-term inflation pressures (such as the recent rises in VAT) and is instead focusing on the medium term. No statement accompanied the BoE’s rate decision today, though we believe the majority of the monetary policy committee will want to see the impact of the increase in national insurance before reacting.* The ECB’s actions will undoubtedly increase the pressure on peripheral European countries, which are still battling to restore market confidence in their public finances. Having resigned from his position last month, Portugal’s now caretaker Prime Minister, José Sócrates, finally yielded to market pressure and publically announced Portugal’s intention to request aid from European partners. An Irish or Greek style bail-out for Portugal would require agreement to conditions that would also include painful structural reforms. We question whether Sócrates has the authority to negotiate such a deal before a new government can be elected. In any case, a bridging loan should be forthcoming in order to avoid a technical default. Looking ahead, we expect today’s ECB rate rise to be the first step in its rate hiking cycle. However, for fear of the euro appreciating too strongly, the ECB is likely to be forced to wait for the BoE and the Federal Reserve to also start raising interest rates, before it can make much progress. We do not expect the BoE to change its position until late summer, and the Federal Reserve until the end of the year.
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Source: BONDWorld – Schroders
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