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Euro interest rates still at 4% Euro interest rates still at 4%
(about 1 hour later)
The European Central Bank (ECB) has kept eurozone interest rates on hold at 4% following its latest meeting.The European Central Bank (ECB) has kept eurozone interest rates on hold at 4% following its latest meeting.
Rates in the region have doubled in 18 months as the central bank has sought to keep inflation in check while economic growth picks up.Rates in the region have doubled in 18 months as the central bank has sought to keep inflation in check while economic growth picks up.
But the decision is expected to be only a temporary reprieve, with more rises expected later this year. But the decision is expected to be only a temporary reprieve, with euro rates expected to rise later in the year.
The prospect of higher interest rates pushed the euro to recent highs against the US dollar and Japanese yen. The prospects of higher rates has pushed the euro to recent highs against the US dollar and Japanese yen.
More rises expectedMore rises expected
The ECB is expected to prepare the markets for further interest rate rises at its news conference shortly. At its news conference following the rates decision, the ECB said its governing council would "closely monitor" inflation - the same wording as used last month and indicating that rates may rise later in the year but not next month.
Analysts will be watching to see what phrases President Jean-Claude Trichet uses about inflation to gauge the timing of the next increase. ECB president Jean-Claude Trichet did not use the term "strong vigilance", which usually indicates that rates will rise in the following month.
ECB rate hike expectations should underpin the European currency Carole Laulhere, Societe Generale
The central bank uses specific language to guide the market on the direction of interest rates, which are now at their highest level in the 13-member bloc for six years.The central bank uses specific language to guide the market on the direction of interest rates, which are now at their highest level in the 13-member bloc for six years.
If the words "strong vigilance" are used, the market will price in a rate increase next month. "Our monetary policy is still on the accommodative side, with overall financing conditions favourable, money and credit growth vigorous, and liquidity in the euro area ample," said Mr Trichet said.
ECB rate hike expectations should underpin the European currency Carole Laulhere, Societe Generale
With the region enjoying a recovery in economic growth, observers say the ECB is likely to want to get interest rates back up to the level of other industrialised nations, such as the UK and the US, in order to curb excessive price rises and wage inflation.With the region enjoying a recovery in economic growth, observers say the ECB is likely to want to get interest rates back up to the level of other industrialised nations, such as the UK and the US, in order to curb excessive price rises and wage inflation.
Winners and losersWinners and losers
After the announcement, the euro reached historic highs against the yen at 167.3, while one euro bought $1.363, up from $1.361 on Wednesday and not far off the all-time high of $1.368, set on 27 April.After the announcement, the euro reached historic highs against the yen at 167.3, while one euro bought $1.363, up from $1.361 on Wednesday and not far off the all-time high of $1.368, set on 27 April.
"ECB rate hike expectations should underpin the European currency," said Carole Laulhere at Societe Generale."ECB rate hike expectations should underpin the European currency," said Carole Laulhere at Societe Generale.
While this could benefit currency investors and savers looking for higher interest rates on bank deposit accounts, homeowners are likely to suffer mortgage repayment increases..For their part, manufacturers could struggle as the stronger currency deters potential buyers outside the eurozone. While this could benefit currency investors and savers looking for higher interest rates on bank deposit accounts, homeowners are likely to be hit by higher mortgage costs.
Manufacturers could also struggle as the stronger currency makes exports from the eurozone more expensive.
"That's one of the reason the ECB has staggered the interest rate increases, so as not to completely dampen consumer and business confidence in the economy, which is just starting to exit a long period in the doldrums," said Bob Munro, chief economist at foreign exchange consultancy HiFX."That's one of the reason the ECB has staggered the interest rate increases, so as not to completely dampen consumer and business confidence in the economy, which is just starting to exit a long period in the doldrums," said Bob Munro, chief economist at foreign exchange consultancy HiFX.