ECB Rate Rise Fails To Lift Euro

September 1, 2000

In a widely anticipated move the European Central Bank (ECB) raised its basic interest rate a quarter point from 4.25 percent to 4.5 percent. The ECB indicated that fears of inflation, which has been running around 2.4 percent recently, and the weakness of the Euro made the increase necessary.

Some analysts had speculated that the ECB might have raised the rate by a full half point, but this could have had an adverse effect on EU growth rates, which have been slowly improving.

The rate rise did little to help the Euro, which is now trading at or near its all time low against the dollar, between 88 and 89 cents. Its value has fallen over 20 percent since its introduction in January of 1999.

As a result, European banks, insurers and financial service companies have to pay a premium of 10 percent or more to acquire dollar based assets; however, those with big stakes in U.S. companies have seen the returns on their earnings and the value of their U.S. investments increase by the same amount.

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