BoE and ECB Keep Rates Unchanged

Published by Filipe R. Costa on Thu, 09/06/2011 - 15:16
interest rate to support

As almost 100% expected, both the BoE and the ECB kept their interest rates at the current level of 0.5% and 1.25% respectively. The BoE has been revealing some concerns about the health of the British economy and has clearly signaled that it will put more weight on growth and unemployment issues than on inflationary pressures. Therefore, it is not expected that the bank changes its current accommodative policy anytime soon.

The ECB always shows more concern over inflation and has proved it will do anything to keep inflation below the 2% target, even if it negatively impacts economic growth. Germany is always vigilant on the ECB, and from the beginning the bet was in a tight monetary policy to push for a strong euro currency. The ECB has already started raising rates, in the April meeting but failed to keep the pace in May and in today's meeting. Inflation was reported at 2.7% for last month, and Jean-Claude Trichet said there is upward pressure because of rising commodity and energy prices. Trichet also said that there is a strong vigilance and that the bank will act in a firm and timely manner doing anything needed to avoid any inflation spiral. Analysts think there is an increased probability of the ECB raising rates in the next July meeting.

Trichet showed a firm conviction towards fighting inflation but the Euro took a hit. It is currently trading around 1.45 after marking a day high at 1.4650. Trichet showed concerns on peripheral economies, and on Greece debt. It also spoke about the banking sector saying that some banks having difficulties to get funds may have to raise capital. Trichet is currently facing a dilemma. Inflation pressure is well present, and economic growth in Germany is healthy, pushing for rate hikes. But, peripheral countries are in a really difficult situation. Raising rates may create additional problems in those countries, bring more instability to the Euro and probably spread all over the Euro zone.

In my view, the ECB is vigilant on commodity and energy prices. If those continue their uptrend, the bank will not have any alternative as to raise its rate at the next meeting, by 25 basis points. Otherwise, if there is some ease on those prices, the hike will be postponed. Spread betters should carefully look at commodity and energy prices during the month for hints on what will happen at the next meeting. For the time being, the Euro was recovering towards 1.47 very aggressively, assuming almost a 100% probability of a rate raise next July. It does not seem to be a realistic assumption. And the situation in Greece is far from being solved. The Euro may start here another downtrend towards 1.40.