Oil and gold surge ahead of likely hike in ECB rates
Published 07/04/2011 | 05:00
OIL, gold and other commodities surged yesterday ahead of an expected rise in European Central Bank rates today.
Oil price futures to be settled in May surged to a 30-month high of $122.49, with gold hitting an all-time high of $1,459 an ounce.
The euro jumped to a 14-month high, due to a decline in the dollar, as markets bet that the 23 members of the ECB governing council would push through a 0.25pc rise in the base rate to 1.25pc.
This is expected to be just the first in a string of rises in the coming months.
Investors bought commodities and the euro because they feel the interest rate rise will depress international growth. They also think the ECB rate rise will not have its intended effect of dampening inflation in the 17-member eurozone.
A string of economists and investment banks lined up to condemn the expected rate rise as a policy blunder, for Ireland, Portugal and Greece.
A study by giant Swiss bank Credit Suisse concluded that interest rates in Ireland, Portugal and Spain should fall rather than rise.
However, because Germany is booming, a rate of plus-4.5pc would be more appropriate in that country, researchers said.
The findings, under what is known as the Taylor Rule, are based on a calculation of what is the most appropriate interest rate given inflation and growth.
Bloxham economist Alan McQuaid said the the weak periphery countries of Greece, Ireland, Portugal and Spain were extremely vulnerable to monetary tightening.
"Floating rate mortgages are a big issue in Ireland and Spain and tighter ECB monetary policy will do little to help already hard-pressed households.
"An even bigger problem for some peripheral states like Ireland is their weak banking sector.," he said.
Some 85pc of mortgages in Ireland are variable, compared with 15pc in Germany. Yesterday, the IMF warned about the dangers of variable rate mortgages. It said variable rates, including trackers, were usually lower than a fixed-rate loan -- at least at the beginning.
But when rates go up, the heavily borrowed become financially distressed, with consequences for the whole economy.
Variable rate loans -- whether they are trackers or standard variable loans -- are the norm in Ireland, the UK and Spain.
But elsewhere in Europe and in North America, long-term fixed rate loans are more common and so there is less disruption from interest rate hikes.
The ECB will raise its main refinancing rate by a quarter-percentage point from a record low 1pc today, according to all 57 economists surveyed by the Bloomberg news agency.
Germany's factory orders increased in February more than forecast, advancing 2.4pc after rising 3.1pc in the previous month, the Economy Ministry said. The rise will give further reason for the ECB to feel it necessary to raise rates.