Market Bulletin: Key financial and economic issues

Market Bulletin: Key financial and economic issues

The European Central Bank shocked financial markets on Thursday by signaling that an interest rise throughout the single currency zone could be as soon as next month, in order to stop inflation from spiraling out of control. This is As the European Central Bank left rates at a record low of 1 per cent. The President, Jean-Claude Trichet said "An interest rate increase in the next meeting is possible, it is not certain". Commentators took this to be as clear a signal as could be telegraphed. Interest rates have been at 1 per cent since May 2009, but inflation pressure has now prompted ECB policy makers to start thinking of increasing rates.

For the weaker nations like Greece, Germany, Ireland and Portugal, this is very bad news. Eurozone inflation hit 2.4 per cent in February, above the ECB's target rate of 2 per cent and with further unrest in North Africa and the Middle East pushing up oil prices, together with the United Nations again warning that food prices are set to continue to rise, the Central Bank thinks it will have little option but to increase rates if it is to meet its policy objective of 2 per cent inflation. The ECB is used to going against the current trend, having raised its main lending rate in July 2008 just as the single currency zone was heading into recession. The ECB also released new forecasts for European growth and inflation. The mid points in ranges calculated by the bank's staff put inflation at 2.3 per cent this year and 1.7 per cent in 2012, up from a previous outlook of 1.8 per cent and 1.5 per cent respectively. Growth is now tipped to be 1.7 per cent this year and 1.8 per cent in 2012, up from 1.5 per cent and 1.7 per cent the previous year. Data for the calculations was taken before the events in Libya and the recent upsurge in oil prices.

Away from these headlines, the European Central Bank also said it will maintain its flow of cash to commercial banks at fixed rates, with a commitment to continue to provide as much cash as the troubled European banks need in loans through to July 12th. This is very good news for the so called "addicted banks" in countries like Greece and Ireland, where they have come to depend on Central Bank funds. Without this funding, their banking systems would collapse. The ECB intends to wind down exceptional measures undertaken to battle the global economic financial crisis at some point, but it has not been specific.

It has been this policy of providing as much liquidity (cash) as possible to troubled banks that has been so criticised by the head of the German Central Bank, Axel Weber, and one of the main reasons why he announced that he could not put his name forward to take over from Jean-Claude Tricket, who retires in the next year. he believes that this policy of continuing to support troubled banks is unhelpful in the longer term and is purely a mechanism by the European's to delay having to take some tough decisions.

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Mike Raybone, Chartered Marketer

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