Thursday, August 03, 2006

European Interest Rates On the Rise

Today, most of Europe saw interest rates rise. As widely expected, ECB raised short-term interest rates from 2.75% to 3%. This implied higher interest rates not only for the 12 countries where the euro is used, but also for Denmark and the many Eastern European countries that pegs their currencies to the euro.

As it was two months since the last rate hike, this means an acceleration of the pace of rate increase from one quarter percentage point every quarter. Still, with money supply growth running as fast as it does now, the ECB is still behind the curve. Expect more interest rate hikes as the rapid monetary inflation eventually starts to express itself in higher consumer price inflation, after having so far mainly expressed itself in rising asset prices.

Somewhat more surprising was the British rate hike from 4.50% to 4.75%. Still, it was hardly an unjustified move given how the U.K. economy have unexpectedly picked up pace again after the temporary slowdown late last year. With consumer price inflation running at 2.5%, well above the 2% target and with house price increases once again accelerating, there was little else for the Bank of England to do.

Sweden was one of the few countries where interest rates did not rise today , but given that the monetary imbalances is in fact worse here, this means that interest rates are eventually going to have to rise even more in Sweden than in the rest of Europe.


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