The Euro climbed sharply today as the European Central Bank (ECB) president Jean Claude Trichet laid a strong hint that European interest rates are to increase. Inflation is running high in the UK, Europe and USA as low interest rates are leading to price rises. This has led many analysts to expect interest rates to rise in these economic areas. Trichet’s press conference today, after March’s interest rate announcement was notable for its inclusion of the sentence:
‘Strong vigilance is warranted with a view to containing upside risks to price stability’
This phrase was widely used during the ECB’s last round of interest rate hikes in 2005. Every time ‘strong vigilance’ was used the base rate of interest would increase the following month. As a result the Euro climbed by 1% against Sterling and 0.5% against the US Dollar immediately after the press conference.
The other notable story from the last week has been the drop in the New Zealand Dollar. The fallout of the earthquake in Christchurch is being felt economically as well as humanely. The Reserve Bank of New Zealand is looking increasingly likely to cut interest rates by 50 basis points to 2.5% to stimulate their economy. If this goes ahead it will be confirmed in the next meeting on March 11. This move is supported by Prime Minister John Key who has said that he would welcome an interest rate reduction.
The New Zealand Dollar has dropped about 10% since the start of the year against Sterling. We are currently approaching a rate of 2.2 New Zealand Dollars to the Pound, which is the highest level since August 2010.
