One of the first letters received by Britain's new chancellor came from Mervyn King, governor of the Bank of England and guardian of the nation's 2% inflation target. The governor must write an open letter of explanation and intent if inflation strays beyond a range of 1% - 3%. In April it was 3.7% so he put pen to paper. Two years ago or more the solution would have been simple; raise interest rates to dampen demand and bring inflation back into line. In the modern post-financial-crisis world with political uncertainty at home, fiscal anarchy across the Channel and low levels of economic growth in developed countries the decision looks less straightforward, especially as the Bank sees this inflation upturn as only a temporary blip.
Although inflationary pressures in Euroland are less severe - 1.5% in the year to April as opposed to Britain's 3.7% - the legacy of the hardline pre-euro Bundesbank is to make its ideological successor, the European Central Bank, especially intolerant of rising prices. In its 11-year history the ECB has been tough on inflation, tough on expectations of inflation. It was two months after the Bank of England's policy rate bottomed at 0.5% in March last year that the ECB reached its own low point at 1.0%. And while the Bank of England was spending £200 billion buying up UK government bonds last year in order to relax monetary policy with 'quantitative easing', the ECB shied away from anything that smacked of printing money.
During the early part of this year the sensation was that, with the recession behind them and economic growth on the rebound, both the BoE and the ECB were girding their loins in preparation for bringing interest rates back up to what they consider normal levels. Europe's response to the Greek debt crisis is changing that perception. After half a dozen false starts the EU put together in May a monster €750 billion rescue plan not just for Greece but for any other country that might find itself in the same position (think Portugal, Spain, Italy). The ECB has had to soak up Greek government bonds that nobody else wants. Governments in Ireland, Italy, Spain, Portugal and, of course, Greece have imposed austerity measures involving public spending and wage cuts as well as higher (or at least better-enforced) taxes.
There can be no doubt that the severity of the measures will have a depressing effect on the economies of the countries directly involved. But it will also affect countries with whom they do (or did do) business. That means not just their neighbours in Europe but the emerging markets and commodity-producers that supply them with zinc, rubber, motorbikes and flat screen TVs. The global recovery is suddenly no longer inevitable: the risk is of a return to global recession. What worries investors now is the possibility of Global Financial Crisis II: This time it's personal.
As long as that concern persists it is unlikely that central banks in Europe - or anywhere else - will rush to tighten the screw with higher interest rates, especially as banks in the private sector are already doing that. For example, it is a matter of supreme indifference to UK consumers whether base rates are 0.5% or 1.5% when they are paying an average of 15% to service their overdraft.
Because of this it is probably fair to expect official interest rates in Britain and Euroland to remain at their current low levels into next year. There are risks to the scenario, not least the danger that inflation could re-emerge in Euroland or refuse to subside in Britain. But with half the continent held down by austerity budgets and reduced incomes it is not easy to see what might possess manufacturers and retailers to bump up their prices.
With steady-as-you-go for interest rates and no horrible economic or political surprises there would be reason to think the sterling/euro exchange rate could remain within the €1.09 - €1.19 range that it has occupied for six months. But horrible surprises have become the rule rather than the exception lately and there is no reason to suppose the show's over. If another Club Med country joins Greece in the queue for handouts the euro will suffer. If Britain's untested coalition government fumbles the task of sorting out the deficit the pound will have to take it on the chin. To paraphrase the opening line of the 1960s kids' series 'Stingray'; 'Anything can happen in the next half year!
French mortgage interest rates, look set to stay put where they are for the time being. For more information on the current best deals please call Athena Mortgages on +44207 471 4513.
Although inflationary pressures in Euroland are less severe - 1.5% in the year to April as opposed to Britain's 3.7% - the legacy of the hardline pre-euro Bundesbank is to make its ideological successor, the European Central Bank, especially intolerant of rising prices. In its 11-year history the ECB has been tough on inflation, tough on expectations of inflation. It was two months after the Bank of England's policy rate bottomed at 0.5% in March last year that the ECB reached its own low point at 1.0%. And while the Bank of England was spending £200 billion buying up UK government bonds last year in order to relax monetary policy with 'quantitative easing', the ECB shied away from anything that smacked of printing money.
During the early part of this year the sensation was that, with the recession behind them and economic growth on the rebound, both the BoE and the ECB were girding their loins in preparation for bringing interest rates back up to what they consider normal levels. Europe's response to the Greek debt crisis is changing that perception. After half a dozen false starts the EU put together in May a monster €750 billion rescue plan not just for Greece but for any other country that might find itself in the same position (think Portugal, Spain, Italy). The ECB has had to soak up Greek government bonds that nobody else wants. Governments in Ireland, Italy, Spain, Portugal and, of course, Greece have imposed austerity measures involving public spending and wage cuts as well as higher (or at least better-enforced) taxes.
There can be no doubt that the severity of the measures will have a depressing effect on the economies of the countries directly involved. But it will also affect countries with whom they do (or did do) business. That means not just their neighbours in Europe but the emerging markets and commodity-producers that supply them with zinc, rubber, motorbikes and flat screen TVs. The global recovery is suddenly no longer inevitable: the risk is of a return to global recession. What worries investors now is the possibility of Global Financial Crisis II: This time it's personal.
As long as that concern persists it is unlikely that central banks in Europe - or anywhere else - will rush to tighten the screw with higher interest rates, especially as banks in the private sector are already doing that. For example, it is a matter of supreme indifference to UK consumers whether base rates are 0.5% or 1.5% when they are paying an average of 15% to service their overdraft.
Because of this it is probably fair to expect official interest rates in Britain and Euroland to remain at their current low levels into next year. There are risks to the scenario, not least the danger that inflation could re-emerge in Euroland or refuse to subside in Britain. But with half the continent held down by austerity budgets and reduced incomes it is not easy to see what might possess manufacturers and retailers to bump up their prices.
With steady-as-you-go for interest rates and no horrible economic or political surprises there would be reason to think the sterling/euro exchange rate could remain within the €1.09 - €1.19 range that it has occupied for six months. But horrible surprises have become the rule rather than the exception lately and there is no reason to suppose the show's over. If another Club Med country joins Greece in the queue for handouts the euro will suffer. If Britain's untested coalition government fumbles the task of sorting out the deficit the pound will have to take it on the chin. To paraphrase the opening line of the 1960s kids' series 'Stingray'; 'Anything can happen in the next half year!
French mortgage interest rates, look set to stay put where they are for the time being. For more information on the current best deals please call Athena Mortgages on +44207 471 4513.
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