August 3rd 2006
Interest rates rise in Europe
The two most important Central Banks in Europe independently raised interest rates today. The European Central Bank (ECB) was first to announce a rate hike, in a move that was widely predicted by investors. The Central Bank of UK, however, caught most investors completely off guard when it announced a rate hike of its own. It appears to be a coincidence that both banks raised rates on the same day, as the economic policies of the UK and of Europe are not entirely related. The news made USD bulls nervous on two fronts: first, the narrowing of interest rate differentials means it is more attractive to move capital to Europe. Second, and less obvious, is the implication that growth is picking up in Europe, at the very moment it is slowing down in the US. The Financial Times reports:
Jean-Claude Trichet, ECB president… said that if the eurozone economy performed as the bank expected, “a progressive withdrawal of monetary accommodation will be warranted”.
Read More: ECB and UK join drive to raise rates