ECB rate increases to open policy gap with Fed

THE European Central Bank is poised to raise interest rates faster than the Federal Reserve for the first time in four decades, opening up a transatlantic policy gap that may help the euro endure the sovereign debt crisis.

ECB president Jean-Claude Trichet and his Governing Council meet next Thursday, a month since signalling a plan to increase the refinancing rate by a quarter-point from a record 1% as euro-area inflation breaches the 2% limit. By contrast, Fed chairman Ben S Bernanke and colleagues affirmed plans last month to buy $600 billion (€426bn) of treasuries through June and to keep rates “exceptionally low” for an “extended period.”

That would mark the first time since at least 1971 when the rate cycle has turned tougher in Europe before the US, according to Credit Suisse. The gap may widen for another 12 months before the Fed starts to catch up, propelling the euro possibly through $1.50 from $1.42, said Gavyn Davies, chairman of hedge fund Fulcrum Asset Management.