This past Thursday, the European Central Bank made the decision to hold its base rate at 4 percent after considering the possible residual effects of the unstable US subprime mortgage market. This decision was made despite rapid inflation and the growing strength of the euro.
Prior to the ECB decision on Thursday, the Bank of England decided to cut the UK base rate by a quarter of a percent, bringing it down to 5.5 percent. The BoE hopes that this rate cut will help ease worries that the economy is slowing.
Dow Jones Newswire conducted a survey of economic analysts, and the majority of them believe that the ECB will hold the base rate at 4 percent at least until the second quarter of 2008. These analysts think that, unlike the UK and the US, the ECB is in no hurry to cut rates.
Inflation increased to 3 percent last month in the 13 countries where the euro is used. The ECB's guideline for where inflation should be at is just below 2 percent. The current rate of inflation is the highest the euro has seen since being released into circulation in 2002.
According to economist Matthias Rubisch of Commerzbank, "Inflation has increased over the recent months and economic data are not so weak that the ECB is really concerned about the economy in Europe. If you look in the future, probably weaker economic data will lead to the ECB lowering rates."
The majority of the uncertainly concerning interest rates and the European economy is emanating from the subprime mortgage troubles being experienced in the US and in other places around the world. The problem that originated in the US is causing problems elsewhere because their bad loans have been repackaged and sold to other banks.