The European Central Bank raised the main interest rate to 1.25% in April from 1% after two years without to ward off inflation as the ECB’s target rate is 2%.
There has not been much change in the rates on offer for mortgages in France since the announcement of the increase, according to French loan specialists Athena Mortgages.
‘Markets and banks had in fact already priced in this increase. We have seen an average increase of about 0.20% in the cost of variable rate mortgages, with some banks opting to further increase their margins,’ said director John Busby.
‘Fixed rates have seen smaller increases but remain on the upward trend as concerns over the viability of some Eurozone economies have an effect on longer term bonds and interest rates,’ he added.
But further increases are on the cards. ‘We should expect further increases to the lowest rates on offer and a flatter market overall as it becomes more expensive for banks to refinance and maintain market beating rates. Although the ECB has indicated this rise in interest rates does not necessarily denote a series of increases, we can be sure that if inflation doesn’t recede over the next quarter, Jean Claude Trichet may start to feel strongly vigilant again,’ explained Busby.
Some analysts predict another increase as early as next month. Inflation in the 17 countries using the euro rose to 2.8% year on year from 2.7% a month earlier, the highest level since October 2010, when it was 3.2%.
Consensus expectations had been for a flat reading compared to March ahead of next Thursday's European Central Bank meeting on interest rates. Analysts said the numbers raised the odds on a rise in rates in June.
‘Although we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move,’ said Aline Schuiling, senior economist at ABN.
‘The upside surprise relative to our forecast may be due to a stronger than expected impact of the late Easter, meaning that core inflation probably was a touch firmer than we had thought,’ said Marco Valli, economist at Unicredit.
‘We see inflation hovering around the current level for some time, with a further acceleration to 3% likely towards the end of the summer,’ he added.
Other data this month, however, has suggested growth in both Germany and the euro zone is peaking and figures from Spain, the biggest economy under threat in Europe's debt crisis, showed unemployment soaring and retail sales sinking.
A monthly European Commission survey showed economic sentiment in the euro zone as a whole fell for the second month in a row to 106.2 in April, down from 107.3 in March and below market expectations of a decline to 107.0.
‘The combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone,’ said Martin van Vliet, economist at ING.
‘Monetary data continue to point to a modest recovery in euro area money and loan growth. While the data in itself do not indicate upside risks to price stability that require further monetary tightening, they are further proof that the economic situation has changed substantially since 2009 which is why the ECB thinks that extremely low interest rates are no longer appropriate,’ explained Christoph Balz, economist at Commerzbank.
