A Good Rate Hike for Europe

Ready for a US Rate Hike?

This implies an interval of two months between interest rate moves instead of the three month interval that has become standard ECB practice in the current interest rate cycle. The next rate hike in the normalization process is expected in October, two months after the expected August move.

This threat took a heavy toll on the ECB s credibility, since an interest rate hike in the midst of the most serious financial crisis in decades was obviously absurd.

First, the divergence of monetary policies between the US and other major economies is already universally understood and expected. Thus, the interest rate differential, like the US rate hike itself, should already be priced into currency values.

The effective interest rate, effective annual interest rate, annual equivalent rate (AER) or simply effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

The European Central Bank should reverse its mistaken decision to hike interest rates.

This is precisely what happened in September, when the financial crisis made it impossible for the ECB to proceed with the interest rate hike that it had announced in August.

However, late last year, Everbright Bank and some others began offering fixed rate mortgages. Take up has been slow, but the April 2006 surprise hike in bank rates may help to sow greater public awareness of interest rate risk.

Even the doves might support a rate hike in September to counter act the charge that they are being bullied out of a September hike by Sarkozy.

Indeed, even the markets were fooled, giving the ECB a good grade for its unremarkable rate hike.

For example, to make his threats of an interest rate hike in the midst of a global slowdown credible, the ECB president is using his press conferences to tell the world how strong European growth is.

America s Interest Rate Puzzle

China s Interest Rate Challenge

Others spoke out as well, and the futures markets quickly predicted another 25 basis point rate hike in March.

The Real Interest Rate Risk

To define an interest rate fully, allowing comparisons with other interest rates, both the interest rate and the compounding frequency must be disclosed.

But such an insignificant rate hike will do little to relieve long term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan s exchange rate.

At the ECB press conference in early July, Trichet signaled at least one more rate hike either in September or October.

But the recent good economic numbers coming out of France should make an October rate hike easier for French politicians to accept.

The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of inflation.

But interest rate convergence caused economic divergence.

But when prices are falling, the real interest rate exceeds the nominal rate.

According to the followers of Knut Wicksell, the central bank must keep the market rate of interest near the natural rate of interest.

But financial decentralization extends beyond interest rate liberalization.

To be sure, all G7 central banks are worried about the temporary rise in headline inflation, and all are threatening to hike interest rates.

Japan s Tax Hike Test

Because the inflation rate is also about 2 , this implies a negative real interest rate, which is confirmed by the interest rate of 0.6 on ten year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation.

The ECB s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg.

Although the meager rate hike was presented as a consensus of the ECB s Governing Council, it soon became apparent that the decision had been controversial.

Trichet even had to rescind the rate hike he had signaled for September, though he still claims the increase has been merely postponed, not abandoned.

At the ECB press conference in early July, Trichet signaled at least one more rate hike either in September or October. Some Council members are known to support two more rate hikes before year end.

At present, the interest rate is less than 0.5 .

Emerging market interest rate spreads now are abnormally low.

Italy, however, chose to squander that interest rate advantage.

And it is the real interest rate not the money rate that counts for economic growth.

That way, limited interest rate spreads could do the work of its missing exchange rate mechanism.

In the United States, this interest rate is the federal funds rate in the United Kingdom, it is the official bank rate.

Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

One may ask how can an interest rate be negative?

Gold prices are extremely sensitive to global interest rate movements.

Financial reforms should top the agenda, beginning with interest rate liberalization.

That could matter a lot in relation to interest rate decisions.

Sometimes interest rate changes have the predicted effect, sometimes they don't.

Nonetheless, current interest rates were described as still appropriate in October, signaling that the ECB has not yet reached a decision to bite the bullet. To be sure, an unexpected slowdown in economic activity or a strong rise in the value of the euro could postpone the inevitable rate hike.