Property, Mortgage & Insurance News from the Best Deal 4 U

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Euro interest rate likely to rise

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Thursday, July 3, 2008 11:45:56

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The decision will be announced at 1145 GMT on Thursday and an increase would be the first for a year.

But there have been many objections to a rate rise, in particular from French President Nicolas Sarkozy.

Critics have argued that the causes of inflation - rising global oil and food prices - would be unaffected.

Sweden's central bank put its main lending rate up to 4.5% from 4.25% earlier on Thursday in a bid to control inflation.

"Inflation has risen substantially and is at its highest level since the mid-1990s," the Swedish Riksbank said in a statement.

It also signalled that more interest rate rises could be on their way if world oil and food prices continue to rise.

Rate hints

Political pressure is unlikely to sway ECB president Jean-Claude Trichet, who said in Thursday's Die Welt newspaper that decisive action was needed to avoid the risk, "that inflation could explode".

Figures at the beginning of the week showed that inflation in the eurozone had hit an annualised rate of 4.0%, which is well above the ECB's target of close to 2.0% and also the highest since official records began in 1996.

Mr Trichet hinted after the last ECB meeting that there could be a rise in July.

"After having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation," he said.

"I don't say it's certain. I say it's possible."

Oil prices

Dr Chakib Khelil, president of the oil producers' group Opec told the BBC on Wednesday that oil prices could rise further if eurozone interest rates are raised.

Rises in eurozone interest rates make the euro relatively more attractive to investors than other currencies.

The euro has risen steadily against the dollar over the past year, and in recent months, when that has happened, oil prices have also risen.

The reason given is that some investors see the US currency and oil as alternative investments, so if they think the dollar is going to fall then they buy oil instead.

This is in contrast to the previous situation, when a weak dollar was seen as a sign of a weakening US economy, which would reduce the demand for oil and hence cut the oil price.