BoE Hikes Key Rate To 5.75%, ECB Holds At 4%; Both Weary of Inflation

The Bank of England [BoE] decided to heed Governor Mervyn King's call for a rate hike, voting to increase its key rate by 25 basis points to 5.75%, a six-year high. The move was forecast by 53 of 60 economists surveyed by Bloomberg; the FTSE 100 held its ground, and was lower by just 0.1% after the decision. In its statement explaining the decision, the BoE emphasized continued inflationary risks, saying "most indicators of pricing pressure remain elevated. The balance of risks to the outlook for inflation in the medium term continued to lie to the upside." British inflation continues to remain above the BoE's comfort zone top end of 2%, though at 2.5%, it has fallen considerably from its high of 3.1% in March. Meanwhile, the European Central Bank held its key interest rate steady at 4%, also as expected. European markets were essentially flat on the ECB's decision to hold. The rate affects the 13 countries which use the Euro. Inflationary concerns remain for the ECB and BoE going forward and Bloomberg analysts surveyed predict another ECB rate hike in September. Though Euro inflation has remained just below the ECB's comfort zone top of 2%, money-supply growth, which the ECB uses to gauge future inflation, unexpectedly accelerated to 10.7% in May, nearly its highest growth in 24 years, while energy prices continue to rise.

Sources: MarketWatch I, II, Bloomberg I, II
Commentary: ECB Hikes to 4% as Expected, Market Awaits Trichet's Comments • The Fed Drama Builds: Bank of England Makes Things More Interesting • Global Interest Yields Still At Top of Ranges
Stocks/ETFs to watch: iShares MSCI EMU Index Fund (EZU), iShares MSCI United Kingdom Index (EWU), Vanguard European ETF (VGK), DJ STOXX 50 ETF (FEU), DJ Euro STOXX 50 ETF (FEZ) , iShares S&P Europe 350 Index Fund (IEV). Currency funds: CurrencyShares British Pound Sterling Trust (FXB), CurrencyShares Euro Trust (FXE), PowerShares DB G10 Currency Harvest (DBV)

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