ECB hikes key rate to 4.25%

Economy | Edward Harrison | July 3, 2008 7:46 am |

So after much posturing about inflation and what to do about it, the Fed backed down, and the ECB stepped up to the plate. What the effect on currencies and the bond market will be is anyone’s guess. But, given the Fed’s rhetoric does not match its actions, I believe they have lost a lot of credibility and that will be bad for the U.S. investing climate.

from MarketWatch:

The European Central Bank on Thursday made good on a threat to hike its key interest rate for the first time in 13 months in a bid to tamp down inflation expectations.
The ECB announced it had boosted its key lending rate by 25 basis points, or a quarter of a percentage point, to 4.25%. Attention turns now to ECB President Jean-Claude Trichet’s monthly news conference at 8:30 a.m. Eastern.
The move came after Trichet repeatedly sounded warnings that commodity-led inflation pressures raised the danger of feeding a wage-price spiral.
Markets currently see strong odds the ECB will hike rates twice more within a year, a scenario some economists see as unlikely given darkening growth prospects for the euro zone.
Trichet, however, is likely to maintain a hawkish tone in the news conference, said Juergen Michels, a European economist at Citigroup, underlining market expectations for further tightening of monetary policy.
“We do not expect a further rate hike as a base case, but there are risks that the ECB may hike again,” Michels wrote. “However, we remain confident that growth will slow further, hence eventually pulling inflation down and allowing ECB easing.”

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