Euro interest hike pressures Fed

The European Central Bank raises its benchmark interest rate ahead of the Fed for the first time in 4 decades.

By Jim J. Jubak Apr 8, 2011 12:53PM
JIm JubakNo surprises here: Thursday the European Central Bank raised its benchmark interest rate from 1% to 1.25%.

But there was something of a surprise in ECB President Jean-Claude Trichet's remarks to reporters. The central bank’s monetary policy is still accommodative, he said, and while "we did not decide it was the first in a series of interest-rate increases, you know from our own doctrine that we always do what is necessary to deliver price stability over the medium term."

The increase in the benchmark interest rate is the first since July 2008. It comes after inflation climbed to an annual rate of 2.6% in March. That’s well above the bank’s target of less than, but close to, 2% inflation.

The financial markets are now looking for another rate increase within a month or two, and two or more increases -- to reach 1.75% -- by the end of 2011.

The ECB rarely moves to raise interest rates ahead of the U.S. Federal Reserve. In fact, this is the first time in 40 years.

The move from the ECB highlights how isolated the Fed is on inflation policies and interest rates -- the European Union, India, Poland, Brazil and China have now all raised interest rates.

The increase in interest rates was so fully anticipated by financial markets that the euro fell against the dollar after Trichet’s comments, from $1.429 to $1.413. But in the medium term, the prospects of further interest-rate increases from the ECB will push the euro up against the dollar.

That’s likely to keep commodity prices -- especially oil and gold -- headed higher.

Related Reading:

1Comment
Apr 8, 2011 4:34PM
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"The move from the ECB highlights how isolated the Fed is on inflation policies and interest rates -- the European Union, India, Poland, Brazil and China have now all raised interest rates"

 

This shows one how acute your misunderstanding of the Fed and Monetary Policy in general really is.

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