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ECB boosts rates
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November 4, 1999: 10:02 a.m. ET
Bank of England, European Central Bank raise rates to head off inflation
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LONDON (CNNfn) - European monetary policy was effectively reversed Thursday as two central banks pushed through widely-flagged hikes in their key interest rates.
The European Central Bank (ECB) increased interest rates in the 11-nation euro-zone by 0.5 percentage point to 3.0 percent while the Bank of England raised its discount rate by 25 basis points to 5.5 percent.
Analysts said the twin moves boosted confidence in the performance of both institutions and the strength of the region's economic recovery. They also pave the way for further increases next year to curb rising inflationary pressures.
Global interest rate policy is clearly changing, with Australia raising its rates earlier this week and the U.S. Federal Reserve expected to raise its rate when it meets later this month.
Senior ECB officials and national central bank chiefs who make up its governing council had carefully prepared the ground for the rise over the last six weeks.
It was their first hike since taking control of the region's monetary policy in January and reversed a 50 basis point reduction in April..
Their decision had a muted impact on financial markets. The euro traded around $1.05 while stock markets continued to move firmly ahead, with the CAC 40 in Paris hitting another record intra-day high.
However, markets were divided over whether the ECB would raise by 25 or 50 basis points, and the decision to opt for the bigger was seen as diluting concerns over the opaque nature of its decisions.
Stewart Newnham, currency strategist at States Street bank in London, said that the ECB now is mimicking the widely respected German Bundesbank and is unafraid to make bold, if infrequent, policy moves. "This will add to their credibility and any risk premium from their opaqueness will be limited," he said.
The Bank of England's decision is its second upward move since the U.K. rate cycle turned in September when the Bank also added a quarter point to its benchmark discount rate. However, rates remain three quarters of a percentage point below their level at the start of the year.
The U.K. rate rise also had a limited impact in financial markets, which had effectively priced in the move. Sterling was virtually unchanged against the U.S. currency at $1.6430, while the FTSE 100 blue-chip index immediately jumped a further 20 points to 6,316 and continued to advance.
The MPC's members voted unanimously to hold rates at their meeting last month, but since then there have been leaked reports of disagreements over the future course of policy.
Data released since the October meeting point to more inflationary pressures stoking up. Average earnings are rising at an annualized 5 percent while house prices jumped 12 percent in the 12 months to the end of October, according to the latest survey by the Halifax (HFX) mortgage bank, published Monday.
While inflation remains below the bank's 2.5 percent target rate, most economists see the target being challenged in about two years time, a trend that could prompt further rate rises next year.
The latest decision wasn't accompanied by any press release or indication of the committee's reasons for the move, but analysts played down the significance of this. "The potential fallout between members has been played up a little much," Newnham said.
Europe on the mend
The euro-zone's recovery is also well-established, while inflationary pressures are beginning to weigh on prices. Consumer prices rose at a 1.2 percent annual rate in August, well below the ECB's 2.5 percent reference target, though the full-year figure is expected to reach 2.3 percent.
Industrial production rose 1 percent in the three months ending in August while more forward-looking indicators -- notably business confidence surveys in France and Germany -- have posted unusually strong increases.
The consumer confidence climate is less robust but, even in lagging countries such as Italy, euro-zone's third-largest economy, the trend is clearly improving.
The ECB is committed to maintaining price stability through watching broad price measures and the trend in money supply. While the former is only showing modest rises, with Italy topping the major economies with a 2 percent rise in October, monetary growth is surging.
The 6.1 percent September leap in euro-zone M3 supply, a broad measure of assets in circulation, followed a number of speeches in which ECB members expressly told the markets how important they would be. The three-month moving average pushed up to 5.9 percent. The ECB's reference rate is for a 4.5 percent increase in M3, a target it has never met. 
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