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Amid jittery global markets, ECB and Bank of England mull path on rates

Amid jittery global markets, ECB and Bank of England mull path on rates

With much of Europe on holiday in August, the European Central Bank's Governing Council will chat by phone Thursday about the state of the economy in the 13 countries that use the euro, mindful of the recent volatility in global stock markets.
But experts are mixed on whether that will give the ECB a reason to put off an increase widely expected for next month, or for the Bank of England to hold off on another rate increase.
Some are convinced that the subprime woes affecting U.S. markets _ which have spilled into sharp but short-lived declines on world markets _ are limited in their reach beyond American borders.
"U.K. and euro-zone housing markets have their own dynamics and the same lenders are neither involved nor are the same lending practices or standards identical," said Andrew Wilkinson of Interactive Brokers in the United States. "In other words, this is a U.S. problem."
The stock market rebound this week follows last week's sharp plunge, which was fueled by persistent worries that a deteriorating lending environment will make it harder for companies to borrow money.
Investors are still nervous about the risk of a global credit crunch, leading to thoughts that central banks in Europe _ eager to avoid any fanning of the flames of concern and panic _ could ease off on their approach toward rate hikes.
Both the ECB and BoE have indicated that a re-evaluation of market risk would be a positive development.
ECB President Jean-Claude Trichet told German newspaper Die Zeit last week that the major market moves had been nothing more than a "healthy correction," and that while it was not a big detractor to the bank's mission of keeping inflation at bay, neither was it a sign to ignore.
"In a number of segments in the global finance system we have observed in the past a certain under-appreciation of risks," he told the newspaper in the interview published July 23. "That was visible in the low level of volatility, the low level of spreads, the low level of risk premiums. During the last weeks we saw a correction. At the moment I would say it has been a healthy correction. But I remain cautious: It is no time for complacency."
Inflation in the euro zone _ the 13 nations with more than 317 million residents that account for more than 15 percent of the world's economic growth _ has been within the ECB's guidelines of just under 2 percent.
The EU statistics agency said Tuesday that the inflation in the euro area eased to 1.8 percent in July from last month's 1.9 percent and that unemployment in both the 27-nation European Union and the euro area held steady in June at a record low of 6.9 percent.
That may be enough for rate hike proponents to clamor for an increase sooner rather than later, said Gilles Moec, an economist with Bank of America in London.
"The hawks will probably focus on the continuation of the fall in the euro zone's unemployment rate to 6.9 percent in July, the lowest level ever recorded since the start of the series in 1990, arguing that the tensions on the labor market will eventually trigger a sharp increase in wage costs," he said in a research note to investors.
However, he said that much of that improvement can be ascribed to structural factors, such as flexible labor contracts in Germany and Italy.
"It would therefore probably be a mistake to assess the impact of the recent decline in the unemployment figures on wage costs on the basis of the experiences of the 1980s and 1990s," Moec said.
Eurostat also said business confidence weakened from its near-record high _ but the euro remains within 2 cents of its recent all-time high of US$1.3852. The weaker dollar makes U.S. exports more competitive, as the strong euro can squeeze European exporters.
A narrowing interest rate gap between the United States and Europe has steadily undermined the dollar. The U.S. Fed has left its benchmark rate unchanged at 5.25 percent for a year after two years of steady increases even as the ECB and Bank of England raised the cost of borrowing.
Higher interest rates, a weapon against inflation, can support a currency by offering investors better returns on investments denominated in that currency.


Updated : 2021-10-17 02:03 GMT+08:00