ECB rate rise - snap comment from F&C

Paul Niven, Head of Asset Allocation at F&C Investments, comments on the rate increase by the European Central Bank: "As widely expected, the ECB raised interest rates today by a quarter point, to 4.25% and, surprisingly, President Trichet indicated that the move may signify the peak in rates. Trichet, in the press conference following the decision, said that the hike would help bring inflation back towards the 2% target and stated that there was now ‘no bias' in terms of future moves.

While the ECB may have no plans to raise interest rates again, given their mandate, they will clearly act again if they see ongoing threats to price stability. Their target is at risk due to surging commodity prices pushing up inflationary expectations and rising labour costs. From our perspective, while the ECB has signalled their intention to keep rates on hold for some time, following this unanimous decision, their present dovish view is based on the predication that inflation expectations will moderate as the year progresses. If this doesn't happen, or if wage growth does pick up significantly then current market expectations, of further rate hikes, will be vindicated."