Economy

ECB rate rises finally on the horizon

With Fed rate hikes stimulating US markets, the question is when will euro zone follow

The Federal Reserve building in Washington, DC: Fed president William Dudley said that the argument for another rate rise to follow last December’s was becoming “ more compelling”. Photograph: Karen Bleier/AFP/Getty Images

Thu Mar 2 2017 - 06:45

Nothing, it seems, can stop stock markets going up. For now, anyway. Often higher interest rates might be seen as a negative, but indications that the US Federal Reserve Board (Fed) is set to increase interest rates in March only served to drive share prices higher.

The ostensible reason was that banks find it easier to make profits in times of higher interest rates – and so bank share prices led the way as the US market hit new record highs and others followed.

The calmer and generally upbeat tone of US president Donald Trump’s address to the US Congress also seemed to encourage the markets, making investors believe that some of his more extreme policy proposals might not be implemented. Time will tell.

Push rates higher

Most analysts now expect the Fed to push rates higher by another 0.25 per cent in March, following the hike in December.

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William Dudley, president of the New York Fed, said this week that the argument for another rate rise to follow last December’s was becoming “ more compelling”. Markets have reacted to this with the probability of a March rise indicated by futures market prices rising above 80 per cent, from less than 40 per cent just a week ago. As a result the US dollar has also risen. Investors are betting that the era of super-low US interest rates is finally coming to an end.

Monetary stimulus

The interesting question now is when will the euro zone start to follow. Not this year, for sure, with the ECB set to maintain its monetary stimulus programme. However, there are clear signs of a pick-up in euro zone economic activity and yesterday’s figures showed German inflation had risen above 2 per cent in February for the first time since 2012. With German elections due in September, political voices in Germany are already playing to the dislike of inflation among the German public, calling on the ECB to start to scale back its monetary stimulus programme.

The ECB is likely to want to be sure rather than sorry. Its monetary stimulus is likely to continue and rates will remain at rock-bottom levels through this year. The question now is whether 2018 might see the first rise in ECB rates from their record lows. This is now starting to look possible.

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