On the ECB Interest Rate Hike
The European Central Bank (ECB) has once again raised the benchmark lending rate by 25 bps to 3.25%, while leaving the door open for further tightening. This is the fifth quarter percentage point hike since December last year and was widely expected. Meanwhile, the Bank of England has kept rates unchanged at 4.75%.
The ECB move comes in the wake of the fastest economic expansion in the Euro-zone since 2000 and the need to maintain “strong vigilance'' on inflation. The ECB, which sets interest rates in the 12 Euro-zone economies, is trying to keep inflation under control and is also worried about a furious growth in household borrowings in some of the member economies.
Though energy prices pulled the consumer price index below 2% in September for the first time in 21 months, it is widely expected that it may rise back above 2% soon. ECB President Trichet assessed that inflation expectations were well anchored but at year end inflation could very well be substantially over and above 2%, even without a change in oil prices.
Analysts are almost unanimous in their expectation of one more hike before year end. Opinion is, however, divided on the outlook for next year. In a Bloomberg survey of economists, 11 of the 23 expected that rates will stay on hold through 2007, nine predicted increases to as high as 4 percentand three forecast a cut to 3 percent.
In US, the Federal Reserve left its funds rate unchanged for a second straight meeting on Sept. 20, after raising it 17 times since June 2004 to 5.25 percent. US accounts for about a fifth of Europe's exports and a slowdown there may affect European economies. An array of soft economic data in US has given rise to expectations that the Federal Reserve may cut rates next year.
The European Central Bank (ECB) has once again raised the benchmark lending rate by 25 bps to 3.25%, while leaving the door open for further tightening. This is the fifth quarter percentage point hike since December last year and was widely expected. Meanwhile, the Bank of England has kept rates unchanged at 4.75%.
The ECB move comes in the wake of the fastest economic expansion in the Euro-zone since 2000 and the need to maintain “strong vigilance'' on inflation. The ECB, which sets interest rates in the 12 Euro-zone economies, is trying to keep inflation under control and is also worried about a furious growth in household borrowings in some of the member economies.
Though energy prices pulled the consumer price index below 2% in September for the first time in 21 months, it is widely expected that it may rise back above 2% soon. ECB President Trichet assessed that inflation expectations were well anchored but at year end inflation could very well be substantially over and above 2%, even without a change in oil prices.
Analysts are almost unanimous in their expectation of one more hike before year end. Opinion is, however, divided on the outlook for next year. In a Bloomberg survey of economists, 11 of the 23 expected that rates will stay on hold through 2007, nine predicted increases to as high as 4 percentand three forecast a cut to 3 percent.
In US, the Federal Reserve left its funds rate unchanged for a second straight meeting on Sept. 20, after raising it 17 times since June 2004 to 5.25 percent. US accounts for about a fifth of Europe's exports and a slowdown there may affect European economies. An array of soft economic data in US has given rise to expectations that the Federal Reserve may cut rates next year.
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