Euro strengthens as ECB suggests increase in September rates

August 22, 2007

Euro strengthens as European central bank suggested its plan to increase the borrowing costs in September rates. The raise is announced in spite of the current instability in financial market.

ECB proved its intention by stating that its monetary policy position has not changed since the beginning of this month. Earlier this month, Jean Claude Trichet, chief of Europen Central Bank, reinforced prospects of a further increase to 4.25 percent.

The beginning of the rate increase is seen to be result of his quoted words ‘strong vigilance’. The uncertainty towards the further increase in the rates is also due to the fall in global financial markets.

Capital economic analyst, Jennifer Mckeown, quoted “The strong words of Mr. Claude has been observed in many rate increase phase, thus we believe September is going to see good rate increase by ECB”. She also said that another increase in December (up to 4.50 percent) is expected, if the future sees the increase rebounding”

The determination of European central bank to increase the rates is accompanied by the rate cut in US Federal reserve.

Chairman of senate banking committee, Chris Dodd, said that a private meeting was held between the higher financial officers. He then added that federal chairman Ben Bernanke is determined to utilize every possible means to handle the credit crisis in the US market.

The session held to discuss the US market situation included federal bank chairman, Ben Bernanke, Chairman of State Senate Chris Dodd and treasury secretary, Henry Paulson.

Pound was found floating strongly. UK manufacturing sector’s survey was not expecting such stronger drift by pound.

Previous news of fall in annual CPI increase from 2.4 percent to 1.9 percent in June has cleared any expectation of any further rate increase by bank of England.

Balance of +9 percent as revealed by Alliance of British industry informed that august saw the highest level of books order in 12 years, which was more than normal.

Analyst at bank of America, Matthew sharratt, expects an increase up to 6.00 percent by bank of England by the end of the year.

Matthew Sharratt also said “Coming months can see a stable market accompanied by stepping up of increase in CPI in Q4”. According to Matthew the reason behind the stability and acceleration in CPI inflation can be the huge fall in oil prices last year.