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Euro rates at 4% in summer pause | Euro rates at 4% in summer pause |
(about 3 hours later) | |
The European Central Bank (ECB) has given the markets a reprieve by leaving eurozone interest rates on hold at 4% for the second month in a row. | The European Central Bank (ECB) has given the markets a reprieve by leaving eurozone interest rates on hold at 4% for the second month in a row. |
The move should alleviate some of the fears over the economic impact of the sharp rise in the cost of borrowing over the past two years. | The move should alleviate some of the fears over the economic impact of the sharp rise in the cost of borrowing over the past two years. |
The decision came after policy makers conducted the monthly meeting by telephone during their summer recess. | The decision came after policy makers conducted the monthly meeting by telephone during their summer recess. |
Economists still believe rates will rise further by the end of the year. | Economists still believe rates will rise further by the end of the year. |
The pause in rate rises, echoed in the UK, should come as a relief to homeowners, consumers and businesses feeling the squeeze from the higher cost of borrowing. | |
Exporters will also be grateful as the strength of the euro against the dollar has been threatening to bite into their profits. But is thought the reprieve will be temporary. | |
Expectations that euro rates will climb again either in September or October were reinforced by ECB President Jean-Claude Trichet, who vowed "strong vigilance" on inflation and other economic data - a signal that, in the past, has meant further rises. | |
But, in an unexpected news conference, he refused to be drawn on the future direction of interest rates. Typically, such conferences are not scheduled after the August rate decision. | |
Repricing of risk | |
Of the current turmoil in the financial markets, Mr Trichet observed that we are seeing a "return to normal in the price of risk". | |
But he added: "We think this evolution in financial markets deserves attention and we will continue to observe shifts in market sentiment." | |
Nervousness of risky assets, like shares, has been brought about by fears that the slump in the US sub-prime mortgage sector is the beginning of a wider credit problem driven by the end of cheap debt that has, over the past few years, been used to fund corporate expansion. | |
The Bank of England's rate-setting body also kept interest rates on the hold in the UK at their current level of 5.75%. | The Bank of England's rate-setting body also kept interest rates on the hold in the UK at their current level of 5.75%. |
But there too, borrowing costs are widely expected to rise again to 6% before the end of the year. | |