Euro Interest Hike Puts Pressure on Fed

04/07/2011 2:05 pm EST


Jim Jubak

Founder and Editor,

No surprises here: This morning 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 almost never moves to raise interest rates ahead of the US Federal Reserve. In fact, this is the first time the bank has raised rates ahead of the Fed in 40 years.

Today’s 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.

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