ECB raises interest rates; BofE holds rates firm

As expected, the European Central Bank raised interest rates in the Eurozone on Thursday. The rate rise was by 25 basis points ti 2.75 percent. Some analysts had speculated earlier in the week that it would hike rates by 50 basis points, but sentiment had turned to an expectation of the smaller rise in rates as the Bank’s meeting drew nearer.

Data contributing to the decision to raise rates included consumer price inflation that was up 2.5 percent in May, above the ECB’s target of below 2 percent. Consumer price inflation had been up by 2.4 percent in May and by 2.2 percent in March. In addition, producer price inflation was up to 5.4 percent in April, with core inflation up by 2.2 percent.

The circumstances that kept the Bank from issuing a 50 bp increase included fears that the recovery in the Eurozone’s economy could be too dependent on growth in export-focused sectors and that domestic growth could stall if money is tightened too much or too quickly. In addition, a 50 bp hike could have strengthened the euro, which would have sent the dollar-cost of exports up. Also, the International Monetary Fund said that the region’s economy could not support too high a rate hike.

Meanwhile, in the UK, the Bank of England voted for the tenth consecutive month to hold interest rates at the current level of 4.5 percent. This decision, too, was expected. Factors playing into the Bank’s decision included April manufacturing output measured at only 0.5 percent higher than it had been a year ago. Industrial output was in worse shape, dropping 1 percent in April over output in the same month last year. In addition, new data shows that the industrial sector in the UK has underperformed the US by 16 percent and Germany by 11 percent since 2002.

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