ECB rate rise: a new era?

8th April 2011

And the differences in philosophy are arguably more significant than the difference in rates.

The ECB believes that higher energy and food prices will have a wider impact. The Bank of England prefers to dismiss these as short term factors.

Fund manager Schroders says the European move was widely anticipated with the ECB president Jean Claude Trichet arguing  for some time that higher oil and food prices could feed into broader based inflation particularly wage inflation.

European economist Azad Zangana notes that this is in contrast to the Bank of England which has so far ‘looked through' short term inflation pressures.                                     

Zangana says: "The ECB believes administrative price pressures such as duties and VAT may be higher due to a need to reduce budget deficits, but also that strong growth in the emerging markets could continue to raise import price inflation. In contrast to the ECB, the BoE tends to look through short-term inflation pressures (such as the recent rises in VAT) and is instead focusing on the medium term. No statement accompanied the Bank of England's rate decision, though we believe the majority of the monetary policy committee will want to see the impact of the increase in national insurance before reacting."

Here on the Telegraph personal finance editor Ian Cowie considers the impact on mortgages and savings, while suggesting that the more numerous, elderly savers make less good TV which may be why their interests are more easily discounted by policymakers.

For a regional take on the interest rate change and the interest rate hold, here is the Belfast Telegraph considering the issue and suggesting borrowers from Belfast to Bristol will be relieved. But it does not think the Bank will hold its position for long.

In terms of the broader impact across Europe, Zangana notes that that the increase in rates will put pressure on countries on the periphery of the EU particularly Portugal which is in the midst of asking for a bailout and which will now have to pay even more to borrow. He is unsure whether the Portuguese acting Prime Minister José Sócrates will have the authority to agree to the painful conditions that would be the price of help.

Cowie's blog provokes a lot of soul searching on the comment boards about the UK's economic woes and the difficult choices facing the Bank of England committee.

johnfromkent says:"Are interest rates low because the Government wants to help the feckless at the expense of prudent savers? Of course not. We have just had the worst recession in 60 years and the jobs market for young people is absolutely desperate. If you really wanted to burst the housing market bubble over the medium term you would do exactly what the Government has done. Enslave our young people in student debt so that they will spend their 20s paying down university debt and won't be able to buy property until their mid 30s. The big winners will be middle aged buy to let speculators."

escapedroger adds: "The idea that savers are the engine of the economy may have been true in a Misters Bradford & Bingley mutualised world but the name of the game now is 'the consumer society' , not the prudent society. Getting back to a sensible way of life is like the street direction ' I wouldn't start from here.'

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