Obviously there is no crystal ball in the markets but this blog will take a look at how an interest rate hike may impact on the Euro-zone, looking at individual states and the zone as a whole. Trichet continued to state that they would need to take a ‘strong, vigilant’ policy against inflation and the markets are beginning to re-evaluate the Euro as there may be another two rate hikes this year.
Firstly let’s get the facts straight – a quarter point hike is by no means a radical rise, bringing rates from 1% to 1.25% is only a natural move as the zone begins to take it’s first baby steps towards a full recovery. It is also likely to help its thriving states – in particular Germany, by far the dominant economy in the zone which should in all theory help the Euro. The French too will not be dissapointed as one of the better performing states and possibly something that Jean-Claude Trichet, the French head of the ECB possibly had in mind when pushing this decision forward. The Southern states (in particular the PIIGS) though wouldn’t have been too excited when they heard the news that the interest rate had risen.
In the wake of the Portuguese bailout, following the Irish and the Greeks,market attention now veers toward Spain. Unlike these other economies the Spanish position poses a real threat to the zone and the Euro as a whole. It is the 4th biggest economy using the Euro and following three other bailouts the European Financial Stability Fund would really struggle to cope. An interest rate rise is particularly dissapointing for Spain as a whole, 85% of their mortgages are variable – even such a small rise in interest rates is likely to cost the economy multiple millions in terms of lost spending. Confidence in the economy and general public spend is hugely important to an economic recovery and so the impact of a rate hike will hit all areas – the public, small businesses, big businesses and the government.
This highlights a huge weakness of the zone as a whole from a ‘single policy fits all’ concept that they have adopted. To manage the likes of Germany and France at the same time as Spain and Portugal is much like trying to manage Manchester United and the local sunday league team under the same tactics and strategy, in the long run it just won’t work!
Fairly recently the Europeans tried to centralise more policy in order to avoid future bailouts – at least some evidence of more long term thinking. Simply put, governments need to stop spending and start saving. Unpopular though it may be, it is the only way for the likes of the Irish, the Greeks and the Portuguese to naturally regain some true economic strength. Conversely at the moment each bailout comes with a high rate of interest that these countries can ill afford, to quote a cliche they seem to be digging themselves into an even bigger hole.
With all these difficulties I would say that the long term future for the Euro is perhaps more worrying than any other currency at the moment and given the levels we are currently at, particularly after a Portuguese bailout it is an extremely attractive time to look at selling Euros. If you would like a more detailed explanation of how the interest rate hike is likely to impact the Euro, particularly in the more short or medium term fill in the form to the right and one of our dedicated currency brokers will be attached.