British rates to rise as ECB stays on hold
British property investment is becoming increasingly popular with Irish investors and last Thursday, the Bank of
England decided to raise British interest rates for the second time in three months, bringing the British base rate to 4%.
Given that British house prices increased by 16% in the 12 months to January, it's little wonder that the Bank of England decided to increase rates. And the strength of the economic recovery in Britain is broad-based.
In January, the British services sector grew at its fastest pace since 1997, unemployment has fallen to a 30-year low, and inflation remains at acceptable levels.
So the outlook for Britain is clear interest rates are set to move higher it's a question of when, not if.
Estimates vary, but we can reasonably expect the British base rate to rise to 4.5% by year-end. If you have British property investments that are funded by sterling-denominated debt, now would be a good time to look at your hedging options.
Meanwhile, the European Central Bank (ECB) surprised no one by keeping our base rate on hold last week. Some politicians had called for the ECB to cut rates, in response to the strength of the euro against the dollar, but the market knew better.
The ECB is mandated to ensure price stability across the eurozone in other words to keep inflation under control. Their remit simply doesn't extend to foreign exchange policy and the ECB's governing council is politically independent, so they are able to resist political pressure.
In their monthly update on economic conditions, the ECB last week commented that interest rates at current "low levels" are appropriate given the economic outlook.
They also note that "inflationary risks should be contained by favourable import price developments, while the economic recovery in the euro area should proceed in line with expectations."
Apart from telling us that the ECB are comfortable with rates at current levels, this statement also seems to suggest that the strength of the euro isn't high on the agenda at the ECB.
ECB president Jean-Claude Trichet has said on several occasions that excess currency "volatility" is unwelcome, but the actual strength of the euro does not seem to be causing alarm bells to ring.
Remember the ECB's statement last week welcomed the fact that inflation will be contained by import price developments a stronger euro makes imports cheaper and forces domestic suppliers to keep prices competitive.
So the ECB are happy to stay on hold for the foreseeable future.
However, longer-term interest rates are starting to rise, anticipating a US-led global recovery. That's the crucial distinction to make if you have euro denominated debt.
The views and opinions in this article are those of the author and do not necessarily correspond with those of Ulster Bank or any other member of the RBS Group.
