ECB increases interest rates to 4%

Michiel de Bruin, F&C's Head of European Government Bonds comments on rate rise from the European Central Bank: "Today, as expected, the ECB raised its main refinancing rate with another 0.25% to 4%, the highest level since August 2001.

“With this hike the ECB continued its path of steady 0.25% hikes in place since late 2005 when rates stood at 2%.

“As the ECB sees monetary policy still being on the "accommodative side" further rate hikes seem likely but will be depended on medium term economic and inflationary expectations. Unlike market consensus the ECB did not raise the mid point for its 2008 inflation forecast range (1.4% - 2.6%).

“Market participants have underestimated the growth dynamic in Europe and bond yields have risen strongly lately. 10 year bond yields in Europe have risen to 4.5% reflecting upside risks to inflation and growth. However with monetary conditions in the form of higher rates and a strong currency now less supportive for growth, some cooling ahead cannot be excluded which could lead to a more positive environment for bond yields going forward."