Markets anticipate European Central Bank rate rise in April

ECB rate

The European Central Bank (ECB) maintained its main refinancing rate at 1% last month despite indications that French inflation will be hitting 2.40% in 2011. The main base rate has been at this level since May 2009 and there is now increasing pressure on the ever-willing-to-be-hawkish ECB to raise rates. Initially inflation was forecast to be 1.8% this year and 1.5% in 2012. However, new ECB forecasts now predict an inflation rate of 2.40% for 2011, dropping back to 1.70% in 2012. The ECB has now used the words “strong vigilance” to describe their stance, which is generally seen as code for an interest rate rise the following month.

Generally, the philosophy of the ECB is to be extremely clear in its communication, with a potential rate rise in April openly discussed, leading the markets to react. Those with variable rate mortgages in France can relax a bit as, according to the ECB President Jean-Claude Trichet, any rate rise in April would certainly not mean the start of a series of hikes. Merely talking about the rate rise has already added approximately 0.15% onto the 3 month Euribor, the index which is use to price the majority of French variable rate mortgages, and which now stands at 1.20%. This increase will be directly impacting thousands of people’s mortgage payments and the currency exchange rate, which has its own dampening effect on the economy and the property market. A French property network in France has reported a 3% drop in the number of sales for the past year, with a 13% fall in the number of sales in Paris where prices per square metre have reached an historic level. Whilst prices are falling in many areas of France, most notably -7% in Alsace -6% in Aquitaine, -6,% in the Midi-Pyrénées, Basse-Normandie and -5.5% in Brittany, there are still many stable areas with the overall market up 2.70% for the first quarter of the year.

So will they or won’t they? The markets are pricing it in, but I personally think the ECB might not raise rates next month.Theeffectson the market of merely talking about a rate risecould be enough for now and the recovery is still fragile in many parts of Europe. See you next month to see ifmy prediction is correct.