By: Dr. Mike Campbell
The European Central Bank has decided to maintain interest rates at their historic low level of 1% for a further month. The rate has been on hold now for 21 months. The idea is that the provision of “cheap” money will allow businesses throughout the Eurozone to borrow at low cost to finance expansion and drive the economic recovery which continues to smoulder rather than blaze. On the downside of this decision, there is an acknowledged risk that inflationary pressure could mount, pushing prices up and so eroding profit margins and making life dearer for consumers (since wage inflation is certainly in-check at the moment).
The official figure for inflation within the Eurozone stands at 2.4%; its highest level for 15 months. In real terms, this level is not that great, particularly in view of the fact that the target figure is 2%. However, the news that rates were to remain on hold sent the Euro lower against the other major currencies.
Now What?
The Euro slipped by 1.2% against the Dollar to $1.364 and by 0.9% against Sterling to €1.183 to the Pound. Given that the US, Japanese and UK central banks all seem likely to continue with their own low interest rate policies, it is likely that the Euro will regain most of this lost ground quite quickly.
ECB President, Jean-Claude Trichet, stated that the rate decision was unanimous. The Bank expects inflation within the Eurozone to stay above the target level for most of 2011 and to moderate again next year. It seems pretty clear (Forex market sentiment notwithstanding) that the major central banks are more concerned with securing the recovery and generating conditions for growth and employment than in keeping a close rein on moderate inflation.