True to form, the European Central Bank raised the main interest rate to 1.25% from 1% after two years without change – ECB president Jean-Claude Trichet forewarning us with the code words “strong vigilance” in the report of their monthly meeting. The ostensible reason for the increase in the base rate is to ward off inflation which stood at 2.70% on the day of the announcement. As in many countries around the world, the target for the Central Bank is a 2% inflation rate, which the ECB felt was too high to avoid acting on despite the debt related financial problems besetting many of the Eurozone members. It should not be forgotten that given the ECB’s position of presiding over monetary policy of a diverse set of economies, it must be seen to act with authority, conviction and clarity.
We have not seen much change in the rates on offer for mortgages in France since the announcement of the increase. Markets and banks had in fact already priced in this increase – the wily foxes. We have seen an average increase of about 0.20% in the cost of variable rate mortgages, with some banks opting to further increase their margins. Fixed rates have seen smaller increases but remain on the upward trend as concerns over the viability of some Eurozone economies have an effect on longer term bonds and interest rates.
We should expect further increases to the lowest rates on offer and a flatter market overall as it becomes more expensive for banks to refinance and maintain market beating rates. Although the ECB has indicated this rise in interest rates does not necessarily denote a series of increases, we can be sure that if inflation doesn’t recede over the next quarter, Jean Claude may start to feel strongly vigilant again.