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ECB set for December rate increase

21st November 2005 | back to article listings BACK    print this article PRINT

Interest rates in the eurozone look set for their first raise in five years after remarks from Jean Claude Trichet, chairman of the European Central Bank (ECB), hinted that the bank was ready to up the base level in response to rising inflation.

According to analysts, it now looks as if the ECB committee, which independently sets levels of interest for euro-member countries, will raise the base rate of interest by a quarter point when it meets next month. Levels of interest in the eurozone are currently at an all-time low of just two per cent, but fears are growing about the dangers of spiralling inflation which is more than half a point beyond its target of below two per cent.

Higher rates on the continent would help reign in the steep property prices, analysts say, making buying a property in the sun seem more appealing to potential investors. Demand has been sliding back of late, but property prices on the continent have still been seeing substantial prices, and the trend has started to put off buyers. Despite the downturn, house prices in Spain and France are still climbing by over ten per cent.

The French economy has also been experiencing a slowdown recently, and any further hike in rates could tighten belts further and cause demand in the property market fall – bringing prices with them. Spain has been in better shape economically, but a rate increase would also slow the country down as more start to save and a dearer euro hits the demand for Spanish exports.

Mr Trichet told a banking conference in Frankfurt that the ECB would not bow to political pressure to keep rates low to spark demand: "The Governing Council is ready to take a decision to move interest rates and to moderately augment the present level of intervention rates in order to take into account the level of risks to price stability that have been identified," Reuters quoted him as saying.

Rates on the continent remain well below those in the UK, meaning that as well as taking advantage of lower prices, British investors would find borrowing on the continent much cheaper than at home. Since the European Union opened up its internal property market, buying a property overseas has been made considerably easier. And with inflation soaring, interest rates remain relatively negative, meaning the house should pay for itself.

A Reuters poll last week showed most economists expect only very gradual ECB tightening in 2006 to reach 2.75 per cent by the end of the year.

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