The Eurozone interest rate rose today to three and a half percent, a five-year high the ECB justifies in the face of some of the strongest European growth since the start of the decade, and fears it will fuel inflation. It is the fifth interest rate rise this year. Back in February we had two and a quarter percent rates in the Eurozone, but in March the ECB began driving the rate up in quarter-point ratchets, although the rises had begun the previous December. It helps in part explain the currency’s current strength.
ECB boss Jean Claude Trichet: “Today’s decison will contribute to ensuring that medium to long term inflation expectations in the Euro area remain solidly anchored at levels consistent with price stability. After today’s increase our monetary policy continues to be accomodative, with the key ECB interest rates remaining at low levels”.
Initial market reaction to the rise was mixed with the Euro steady, and stocks added to earlier gains. Trichet also underlined the higher rate was still, in real terms, low. One reason the bank can be so confident about raising rates is that growth looks so resilient. The start of the year saw it nudging three percent according to the bank’s figures, and while growth will cool a little next year it is still at a healthy level. Lower growth will also drag down inflation, too. The critical sector driving growth has been consumer spending, so vulnerable to interest rate rises, and services, while other money-earners have languished. Any new rise is not likely before March.