European Central Bank Raises Key Interest Rate

by: SA Editors

The European Central Bank raised its key interest rate a quarter of a point to 3.5%, its sixth quarter-point increase in a year.ECB rates The move was somewhat surprising in view of the euro's position near a 20-month high against the dollar, as some fear the currency's strength could stunt economic expansion. A strong euro can ease inflation and relieve pressure on the central bank to raise interest rates, but it can also hurt exports and cancel out European wage gains. The euro rose to $1.3367 this week, its highest since March 2005. Inflation may range between 1.5% and 2.5% next year, down from 2.1-2.3% this year. Meanwhile, the dollar remained flat ahead of a U.S. report on nonfarm payrolls expected this morning. State unemployment benefit filings declined this week, erasing a sharp increase last week. That movement, coupled with a higher-than-expected increase in private-sector hires last month, might imply resilient economic growth that could counter fears of a coming recession.
• Sources: Newsday, Bloomberg, Business Week, Marketwatch, Forbes
• Related commentary: Is the Economy Stronger Than Expected? Stay Tuned for Friday's Report, The Dollar's Decline: Quite a Spectacle, High Stock Prices, Lower Bond Yields and the Declining Dollar, Dollar Decline? What Dollar Decline?! It's Arbitrage.
• Potentially impacted ETFs: SPDRs (NYSEARCA:SPY), iShares Lehman 1 - 3 Year Treasury Bond Fund (NYSEARCA:SHY), iShares Lehman 20+ Year Treasury Bond Fund (NYSEARCA:TLT), iShares Lehman 7 - 10 Year Treasury Bond Fund (NYSEARCA:IEF)

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