# Increase in ECB Interest Rates



## SteelBlue05 (18 Nov 2005)

Hi,

Anyone care to speculate by how much the ECB will increase interest rates by? 

S


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## ClubMan (18 Nov 2005)

Why - what point is there in speculating about this stuff?


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## SteelBlue05 (18 Nov 2005)

Why ask any questions on this forum? Surly this forum is about giving factual responses, opinions, and thoughts?

Speculation not allowed on askaboutmoney.com?


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## ClubMan (18 Nov 2005)

Speculation is, by definition, not factual. I never said that people could not discuss this matter. I merely asked why you or anybody else would see any point in speculating about future interest rate performance.


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## SteelBlue05 (18 Nov 2005)

Didnt say it was. Hey you dont have to respond to the post if you dont want to give your opinion on what the increase may be. 

I thought maybe someone with some knowledge it this may have a good idea on the increase. 

Why do I have to justify posting a question?


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## Eurofan (18 Nov 2005)

.25 seems likely, .5 would probably be excessive given the inflation fighting stance.

(as for why, well sometimes it's interesting to try and second-guess these things to try and understand better the hows and whys of whats going on, I wouldn't be putting any money on it but I enjoy the game)


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## demoivre (18 Nov 2005)

ClubMan said:
			
		

> Why - what point is there in speculating about this stuff?



To try and profit from it.


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## demoivre (18 Nov 2005)

SteelBlue05 said:
			
		

> Didnt say it was. Hey you dont have to respond to the post if you dont want to give your opinion on what the increase may be.
> 
> I thought maybe someone with some knowledge it this may have a good idea on the increase.
> 
> Why do I have to justify posting a question?



You don't - you just ignore the posts that don't interest you or the ones you can't be bothered replying to!


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## ClubMan (18 Nov 2005)

SteelBlue05 said:
			
		

> Didnt say it was.


You implied that it was:



> Surly this forum is about giving factual responses ...
> 
> Speculation not allowed on askaboutmoney.com?





> I thought maybe someone with some knowledge it this may have a good idea on the increase.


 Knowledge of predicting the future? Don't think so.



> Why do I have to justify posting a question?


 As above - you don't.



			
				demoivre said:
			
		

> To try and profit from it.


 How exactly? Timing the market and attempting to second guess the financial institutions and the fixed rates that they set is a mug's game.


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## SteelBlue05 (18 Nov 2005)

Clubman, I'm not interested in your usual reponse of dissecting people posts, the post is a simply question. You're just boring me now with this.


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## ClubMan (18 Nov 2005)

SteelBlue05 said:
			
		

> Hi,
> 
> Anyone care to speculate by how much the ECB will increase interest rates by?
> 
> S


OK - then. Pick a number...

1%, 0.5%, 10%, -4% etc.

I can give you a few more if you want.


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## SteelBlue05 (18 Nov 2005)

ClubMan said:
			
		

> OK - then. Pick a number...
> 
> 1%, 0.5%, 10%, -4% etc.
> 
> I can give you a few more if you want.


 
I was looking for an informed guess, not a clowns guess. I am sure based on historical changes that 10% is unlikely and that maybe 0.25% is likely based on the what the ECB is trying to do. Come on, do I have to do all the work for you. I know you are more intelligent than that.


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## ClubMan (18 Nov 2005)

SteelBlue05 said:
			
		

> I was looking for an informed guess, not a clowns guess. I am sure based on historical changes that 10% is unlikely and that maybe 0.25% is likely based on the what the ECB is trying to do. Come on, do I have to do all the work for you. I know you are more intelligent than that.


 You never specified any timeframe.

Yours faithfully
_Coco_.


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## SteelBlue05 (18 Nov 2005)

ClubMan said:
			
		

> You never specified any timeframe.


 
huh? what do you mean?


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## ClubMan (18 Nov 2005)

SteelBlue05 said:
			
		

> Anyone care to speculate by how much the ECB will increase interest rates by?


 Over 6 months, a year, 5 years, 10 years, a century etc.? Even a clown would know that this information is pertinent to the question.


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## SteelBlue05 (18 Nov 2005)

Are you like this in real life ClubMan or just when you are online?


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## ClubMan (18 Nov 2005)

SteelBlue05 said:
			
		

> Are you like this in real life ClubMan or just when you are online?


This is real life isn't it?


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## SteelBlue05 (18 Nov 2005)

enough said I think.


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## SteelBlue05 (18 Nov 2005)

ClubMan said:
			
		

> This is real life isn't it?


 

I think its easy to be an annoying twit when hiding behind an annoymous username, I just wondered if you are like this to people you meet at work, your neighbours, etc?


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## efm (18 Nov 2005)

Why do we expect the ECB to raise rates ? Eurozone economic growth is still below 2% and is only expected to rise above 2% next year.

My own personal opinion is that the ECB will increase by 0.25% in or around June assuming growth projections are correct and possibly by another 0.25% in September / October time.

However, there is a case to be made for the ECB to decrease the rates even further, and ignore the short term risk of an increase in inflation, in order to stimulate the Euro economies (ie like Greenspan and the Fed did over the last three years in the states)

With regard to speculation over changes in the ECB rates - I think it is worthwhile to discuss the possibilities / probabilities of short term changes in interest rates as this can have an impact on peoples investment decisions - and by discussing it, those of us who aren't experts, can increase our knowlegde of the way these things work.

EDIT - post crossed with the last four above - if I had known that this discussion would descend into childish fighting I wouldn't have bothered posting!!!


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## ClubMan (18 Nov 2005)

I thought that you'd said enough? 


			
				SteelBlue05 said:
			
		

> I think its easy to be an annoying twit when hiding behind an annoymous username


Don't be so hard on yourself mate.


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## SteelBlue05 (18 Nov 2005)

Hi Efm,

I read this today on rte.ie...

"The European Central Bank sent a clear signal today that it is about to raise its key interest rates, with ECB President Jean-Claude Trichet saying the guardian of the euro was 'ready' to take a decision on rates. "

So it looks like its on its way....


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## SteelBlue05 (18 Nov 2005)

ClubMan said:
			
		

> I thought that you'd said enough?
> 
> Don't be so hard on yourself mate.


 
Is this a competition on who has the last word? Ok Clubman you have it.


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## Duplex (18 Nov 2005)

My guess (their I’ve said it) is 0.25% followed by further raises of 0.25% over the coming months cumulating with a base rate of 3% in the summer of 2005.  I love speculating on the future its soooo liberating.


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## demoivre (18 Nov 2005)

ClubMan said:
			
		

> You implied that it was:
> 
> How exactly? Timing the market and attempting to second guess the financial institutions and the fixed rates that they set is a mug's game.



I took your reference to " stuff " as a reference to financial markets generally. You don't have to second guess anyone .You need to make sure that you make more on your winning positions than you lose on you losing positions. What distinguishes success from failure in trading financial markets is discipline and money management.


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## DrMoriarty (18 Nov 2005)

Duplex said:
			
		

> soooo liberating.


Sinfully so...  

Now, can we please delete posts #2 through #24 and have a bit less of 'that kind of thing', please? It hurts my poor old eyes.

A guy in the pub here beside me swears they're gonna kick the ECB rate up to 9% or 10% — sort of 'back to the Seventies' vibe by Monsieur Trichet, as he finally loses the plot. But then again he might just be indulging in idle speculation...


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## efm (18 Nov 2005)

> Originally posted by efm:
> Why do we expect the ECB to raise rates ? Eurozone economic growth is still below 2% and is only expected to rise above 2% next year


 
And then:



> Originally posted by SteelBlue05
> Hi Efm,
> I read this today on rte.ie...
> "The European Central Bank sent a clear signal today that it is about to raise its key interest rates, with ECB President Jean-Claude Trichet saying the guardian of the euro was 'ready' to take a decision on rates. "
> So it looks like its on its way....


 
This goes to show how I can be proven wrong in less than 2 minutes, and also why I am not an economist!!


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## ClubMan (18 Nov 2005)

demoivre said:
			
		

> You don't have to second guess anyone .


 To make money on interest rate speculation you need to second guess the fixed rates set by the institutions. For example, to make/save money on a fixed rate mortgage I need to second guess the lender's fixed rate and assume that I can figure out that they are wrong and that my prediction of the future is more accurate. This is effectively gambling. Since this thread was originally posted in the _Mortgages & Home Buying _forum I assume that the context is primarily in relation to mortgages. I see no logical reason why anybody can or should base mortgage selection decisions on speculation about future interest rate fluctuations. But I'm just a clown so what would I know...


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## CoffeeBrew (18 Nov 2005)

I'd expect .25% in the first move - looking like December.

Please note:

The words "expect" and similar expressions are intended to identify _forward-looking statements_.

This forward-looking statement speaks only as of the date of this message. I expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the my expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part.


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## CoffeeBrew (18 Nov 2005)

SteelBlue05 said:
			
		

> Hi Efm,
> 
> I read this today on rte.ie...
> 
> ...


 
You read it on RTE.ie ? I posted it on this website hot off the line before RTE carried the story


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## demoivre (18 Nov 2005)

ClubMan said:
			
		

> To make money on interest rate speculation you need to second guess the fixed rates set by the institutions. For example, to make/save money on a fixed rate mortgage I need to second guess the lender's fixed rate and assume that I can figure out that they are wrong and that my prediction of the future is more accurate. This is effectively gambling. Since this thread was originally posted in the _Mortgages & Home Buying _forum I assume that the context is primarily in relation to mortgages. I see no logical reason why anybody can or should base mortgage selection decisions on speculation about future interest rate fluctuations. But I'm just a clown so what would I know...


I agree with that . As I said I thought when you asked "what point is there in speculating about this stuff?" you were referring to financial markets generally ie what's the point in speculating on financial markets ?


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## Duplex (18 Nov 2005)

What amazes me about this apparent abhorrence of making reasonable forecasts of such important issues as the cost of money is that the distain does not seem to extend to plainly uninformed decisions by posters discussing investments in property here and abroad. 

These investors taking wild stabs at the net present value of a flat in Sophia are never chided for their barefaced conjecture, even thought the time frame is measured in decades and not months and the variables involved are numerous and unfathomable. 

Any investment is time specific and therefore dependent on occurrence in the future, think about it.


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## ClubMan (18 Nov 2005)

For what it's worth this issue was also raised here (click on the link in the top right for the full thread).


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## z107 (18 Nov 2005)

> 1%, 0.5%, 10%, -4% etc.



It would be excellent if they were to raise the interest rate by -4%. Would the bank start paying me the interest on my mortgage?  (Although I wouldn't fancy having any savings accounts)


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## tyoung (18 Nov 2005)

The reason why interest rate changes are interesting(No pun intended) is twofold.  Firstly the pricing of shorterm interest rates is unique in that is set by a human/committee of humans. This means that central banking watching is akin to soviet style Kremlin watching in which every phrase is pored over and analysed and that's done   secondly because interest rates are the price of money which in turn   effect the price of ALL financial assets.  If monetary policy is held tight this favours bonds and cash. If monetary policy is loose it favours equities and hard assets like property and commodities.


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## beattie (18 Nov 2005)

The 0.25 on Dec 1 seems to be a given IMO. After that it is hard to say though I think there will be at least one extra hike by April. I wonder if this will have any effect on property prices though I expect a raft of reports about more huge increases in property and how the market will be unaffected by interest rate increases. No wonder why Trichet is particularly concerned with the state of our housing market.


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## onekeano (18 Nov 2005)

Sounds like .25% by Christmas and a full 1% by end of 2006 seems to be the general consensus - German  economy havig better than expected results and bean counters concerned about inflationary issues.

Roy


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## Dowee (19 Nov 2005)

onekeano said:
			
		

> Sounds like .25% by Christmas and a full 1% by end of 2006 seems to be the general consensus - German  economy havig better than expected results and bean counters concerned about inflationary issues.
> 
> Roy



Surely inflationary issues are more the concern of economists and not bean counters


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## joe sod (20 Nov 2005)

"If monetary policy is held tight this favours bonds and cash. If monetary policy is loose it favours equities and hard assets like property and commodities."

Well monetary policy has been loose since 1981 and bonds have been on a bull run since then and commodities in a bear market. However the tide seems to have turned since 2001 and commodoties have been rising strongly along with property. However we have had a few short term property booms since 1981 but bonds and commodities seem to follow much longer cycles. In the 1970s we had rising interest rates and rising commodities and falling bond prices. Then interest rates were chasing commodity prices which were causing the inflation. However this time it is not commodities that are causing the inflation but property prices and the additional costs it is putting on other sectors of the global economy. It is note worthy that one commentator on another thread asked the question whether rising interest rates could themselves be inflationary because they caused the price of debt to increase.


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## SteelBlue05 (21 Nov 2005)

ClubMan said:
			
		

> Since this thread was originally posted in the _Mortgages & Home Buying _forum I assume that the context is primarily in relation to mortgages.


 
FYI, it was originally posted in the "Banking,Borrowing, and Credit Cards" forum.


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## ClubMan (22 Nov 2005)

Trichet hints at modest rates hike - RTÉ News


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## CoffeeBrew (23 Nov 2005)

ClubMan said:
			
		

> Trichet hints at modest rates hike - RTÉ News


 
Interesting how the debate has been shifting in the last few months

We've escalated from:

_Will the ECB lower rates?_

to

_When will the ECB raise rates?_

and now we're at

_How modest will the ECB in their rate increases?_


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## CoffeeBrew (23 Nov 2005)

Otmar Issing (ECB Chief Economist) spoke this afternoon.

At this point he expresses some concern for those countries where variable rate mortgages are prevalent (e.g. Ireland !!)

These type of loans provide a direct channel to impact consumer spending

They carry the risk that the borrower will attach excessive importance to the current level of interest rates

More pronounced housing market cycles (Boom2Bust)
[broken link removed]


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## beattie (23 Nov 2005)

I think Trichet has voiced similar concerns. i would have liked to be a fly on the wall at some of the recent meetings he had over here with the central bank.


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## Sherman (24 Nov 2005)

I would have thought the fact that interest rates have such a direct and immediate impact on mortgage repayments in places like Ireland would be a good thing if you're a central banker? You can almost immediately influence spending etc. in the economy?


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## sonar (24 Nov 2005)

Perhaps so if our central bank had control of the reins.

Maybe Issing was alluding to the problems some countries could face compared to those countries where variable rates are not so common.

Bit like applying certain brake pressure will slow some cars and the same pressure will slow a different car more severely.


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## podgerodge (1 Dec 2005)

ECB have put the rates up a quarter of a percent today


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## beattie (1 Dec 2005)

Is there any indication when the next increase will be?


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## SteelBlue05 (1 Dec 2005)

beattie said:
			
		

> Is there any indication when the next increase will be?


 
Spring sometime is all I heard. Likely to be another .25% increase if it goes ahead. But no one knows for sure.


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## CoffeeBrew (1 Dec 2005)

Trichet gives a press conference at 2.30pm CET today. 

You can watch it on a live webcast from www.ecb.int

Don't know how much he'll be giving away though: it might be the usual central-banker-speak that requires some interpretation and allows for wriggle-space.

Merrill Lynch ("world's largest securities firm") have upped their estimate of 2006 ECB rates to 3.5%. This is a bit on the high side compared to other estimates but apparently alarm bells have been ringing inside the ECB that explain their sudden urgency to move interest rates from 2%.

Interesting to hear if Trichet gives any clues.


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## Eurofan (1 Dec 2005)

SteelBlue05 said:
			
		

> Spring sometime is all I heard. Likely to be another .25% increase if it goes ahead. But no one knows for sure.


A few things were of interest I thought.

Trichet was at pains to make clear that this wasn't neccesarily the first of a series of rises, rather that it was a prudent move with regard to warding off inflation and maintaining that all-important 'price-stability'. This more than anything would seem to guide the ecb.

He was also at pains to explain that the ecb were very proud of being considered the 'most predictable' central bank of the majors. It was facinating hearing him responding at length to jouralists attempting to twist his statement to something quite different. All in all I'd imagine if another rate increase is on the cards in the next few months there'll be plenty of hints suggesting this in the run-up to the event (as happened this time).

I've lost the actual quote now so don't kill me if i've gotton the wording wrong but he did mention concern about house prices in parts of the eu, not for the first time either but interesting that it's part of the big picture for them.


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## daithi (3 Dec 2005)

I wonder how long it'll take all Irish mortgage providers to raise their rates?it seems to me that theyre's always a delay in lowering the rates when the ecb cuts theirs..daithi


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## podgerodge (8 Dec 2005)

AIB have put their rates up today according to their website www.aibmortgages.com

Just rang them to confirm fixed nominal rates:


3yr was 3.47 now 3.98 - increase of .51%
4yr was 3.65 now 4.20 - increase of .55%
5yr was 3.82 now 4.30 - increase of .48%

So they have increased their fixed rates by double the ECB increase!


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## CoffeeBrew (8 Dec 2005)

Haven't seen this reported in any of the Irish sources this morning but the ECB is starting to repeat the language it used to signal the market prior to the last interest rate rise.

Otmar Issing is again saying "If necessary, we will act, and we can act at any time"

Although he repeated that interest rate rises will not be regular and automatic. He has suggested that they will act against inflation as needed.

He has also said recently that he expects inflation to stay above target throughout 2006 and 2007 - so draw your own conclusions from that !!

If growth proves robust in the euro-region, my bet is there'll be no stoppin' them.

[broken link removed]

[broken link removed]


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## cloughy (9 Dec 2005)

PodgeRoger

I think you have got the wrong rates if you look at the link they are as follows:

1 Year Fixed Rate
(new business) 3.31% EUR 5.511 Year Fixed Rate 
(existing business) 3.41% EUR 5.972 Year Fixed Rate 3.48% EUR 6.003 Year Fixed Rate 3.56% EUR 6.044 Year Fixed Rate 3.71% EUR 6.165 Year Fixed Rate 3.84% EUR 6.21

not as big increases as you mentioned, eg
3 year fixed was 3.47 now 3.56 - increase of .09% if I'm not mistaken.
and the 5 year fixed is now up to 3.84 from 3.82 only a rise of .02%. 

I dont know where you got the rates you quote, but maybe confusing rates with APR, which is like comparing apples and oranges.


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## CoffeeBrew (9 Dec 2005)

Otmar Issing is an ECB "hawk". The December 1st increase of 0.25% was a compromise. Some members where calling for a 0.5% increase. I'd be willing to bet that Issing was one of them !

Here's the man (back row on the right):
[broken link removed]

Issing resigns from the ECB in May. Can we expect his replacement to take a kinder gentler approach to monetary analysis and interest rates?

That's not looking likely at this point. His replacement could be Jürgen Stark, vice-president of Germany's Bundesbank. This man is also
a hardliner when it comes to emphasis on monetary analysis and the money supply numbers in the euro-region are much higher than they would like.


*"Bundesbank's Stark Says ECB Rate Gains Won't Hurt German Growth"*
http://www.bloomberg.com/apps/news?pid=10000100&sid=atmbkpvqyxA0&refer=germany

"*Germany’s Stark tipped to replace Issing at ECB"*
[broken link removed]


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## gearoidmm (9 Dec 2005)

Not to mention that recent data from Germany will have them all over at the ECB clapping each other on the back for how right they were - 

'ECB outlook supported by rise in Germany's industrial production'
http://www.finfacts.com/irelandbusinessnews/publish/article_10004199.shtml

This may suggest an earlier rate rise than we had anticipated
And real interest rates are still negative.


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## beattie (9 Dec 2005)

I have to agree with previous post that we could have another increase sooner than expected. Once the Germans want higher rates I think the ECB will accommodate them whereas when small countries like us who needed them our requests would habe fallen on deaf ears IMO


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## podgerodge (9 Dec 2005)

cloughy said:
			
		

> PodgeRoger
> 
> I think you have got the wrong rates if you look at the link they are as follows:
> 
> ...



Hi Cloughy
The rates you are quoting are the APR's detailed on the site which take into account the rest of the 20 year period at current variable rates.  I was quoting the actual interest rate which is not displayed there but were given to me by AIB and I have just confirmed them.  half percent increase on the fixed rates.


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## CoffeeBrew (9 Dec 2005)

beattie said:
			
		

> I have to agree with previous post that we could have another increase sooner than expected. Once the Germans want higher rates I think the ECB will accommodate them whereas when small countries like us who needed them our requests would habe fallen on deaf ears IMO


 
(Sorry podgerodge, we seem to have two interleaved threads goin' on but easy enough to follow ?)


Governing Council members Axel Weber of Germany and Yves Mersch of Luxembourg are striking "a more aggressive tone" on interest rates today.



> Weber said in a newspaper interview that upward risks to price stability persist and that he could not rule out
> another rate tightening coming early and without much notice.


 
(Note: Weber is also German)
Looks like the groundwork is being laid already for the next hike ?

http://today.reuters.com/business/newsarticle.aspx?type=tnBusinessNews&storyID=nL09632651&imageid=&cap=


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## sonar (12 Dec 2005)

The ECB has introduced two cartoon characters to educate young (and older perhaps?) people on the importance of price stability and therefore higher interest rates!

The girl cartoon character could be symbolic of Ireland.... green eyes, red hair and green t-shirt.

We Irish do seem to have some lessons on interest rates coming our way...

[broken link removed]


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## Gabriel (12 Dec 2005)

sonar said:
			
		

> We Irish do seem to have some lessons on interest rates coming our way...



Surely that depends how high the rates go, no?


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## sonar (12 Dec 2005)

Interest rates will stay at emergency low levels.
Interest rates will stay at emergency low levels.
Interest rates will stay at emergency low levels.

Gosh, repeating it often enough, I think I'm actually starting to believe it.............NOT !!


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## CoffeeBrew (13 Dec 2005)

sonar said:
			
		

> The girl cartoon character could be symbolic of Ireland.... green eyes, red hair and green t-shirt.


 
And her name is Anna. If ever there was a name that represented Dublin (Anna Livia) that would be it !  

Those crafty divils at the ECB might be trying to edumacate us on interest rates.

Lets follow Anna - her with the green eyes and red hair - over time as she learns some important lessons from the ECB. Shall we ?


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## DrMoriarty (13 Dec 2005)

I dunno — they both look rather Pokémon-ish to me, especially the fella...

Subliminal acculturation? Europe's new masters? (etc.)


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## CoffeeBrew (13 Dec 2005)

Good point - they are a bit Pokémon-like.

Maybe they should've introduced some little monsters. Dark Pokémon like Debtish and bubbledon ?


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## nahdoic (13 Dec 2005)

Oh no it's the inflation monster!


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## DrMoriarty (13 Dec 2005)

[broken link removed][broken link removed]


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## ClubMan (13 Dec 2005)

CoffeeBrew said:
			
		

> Maybe they should've introduced some little monsters. Dark Pokémon like Debtish and bubbledon ?


Like the one in the picture you mean?


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## CoffeeBrew (13 Dec 2005)

ClubMan said:
			
		

> Like the one in the picture you mean?
> http://www.ecb.int/home/shared/img/dvdcover_en.jpg


 
Yup - he'll have to do. Ugly enough to be inflation that's for sure. 
Looks a bit lecherous though for a Pokémon and he should watch where he's reaching that fiendish little hand.


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## beattie (16 Dec 2005)

Will this lead to an earlier increase in rates again?

http://www.bloomberg.com/apps/news?pid=10000085&sid=atBV00p0SEwI&refer=europe


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## Marie (17 Dec 2005)

I would not describe myself as financially astute or even having any financial literacy as my field is the human and behavioural sciences and academia so I come onto this forum to try to balance my ineptitude.  I've been trying to follow financial events in the EU recently as I am desperately trying to relocate to Ireland from UK but the gap has always been too great.  Despite the "hype" when push comes to shove and I do the maths I would be worse off transferring job and domicile to RoI _at the moment!_  With that as background, can someone explain to me (because I don't really understand this since Black Wednesday and the UK dropping out of the European Exchange Rate Mechanism (?) what IS the rationale for pegging EU interest rates at such an artifical low?  It appears to make no sense as those outside it (America, UK, some Scandinavian countries, Indian/Asian/Chinese sub-contenents)  are not apparently subject to inflationary pressures because of the cost of borrowing.  I know this.  I have just been down my local high street where what were formerly "the January sales" now start in November to stimulate trade.   Can anyone explain the rationale of pegged interest rates and sluggish economic growth?.......or am I completely off-beam?  The corollary of this is - of course - that raised by a poster above which is how do nation-states of very different sizes and potential (e.g. Ireland vs. Germany) arrive at an accommodation on this?


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## Duplex (18 Dec 2005)

> Can anyone explain the rationale of pegged interest rates and sluggish economic growth?...


 
My guess.




*David Ricardo*, _*"labour is dear when it is scarce and cheap when it is plentiful."*_


The west is experiencing deflation brought on by globalisation, cheap labour, more efficient production and nascent consumer economies in the East. The most telling illustration of the impact of deflation can be witnessed in the money markets in Europe and the US where long dated debt (ten years plus) is yielding about the same as short dated debt (current base rates). Which means; that the money markets are willing to bet trillions of dollars and euros that inflation will not be an issue for years in the future. 

Western governments are not concerned by inflation but by deflation (see Japan). The text book method of seeing off deflation is to increase the amount of money in the economy, hence historically low interest rates, (Japan 0.10%) But western consumers have been unable to absorb all the cheap production created in the East and the Eastern consumer economy is still too small and poor to help out. 

As workers in India, China, E Europe and South America produce more profits for companies than their western counterparts (because they(easterners) are cheap) more investment flows to these countries. Libertarian economists us the phrase ‘creative destruction’ to describe this outsourcing of jobs to the East, they postulate that the west will become a ‘knowledge based’ economy. 

I think that incomes in the west will be influenced by globalisation and that the ‘knowledge based’ economy based mainly in the west smacks of colonial arrogance. Western economies will have to adapt to the challenge of globalisation, how this is done will involve a combination of cost cutting, efficiencies and the utilization of competitive advantage.


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## DrMoriarty (18 Dec 2005)

In fairness, your reference is to a text written in 1817 — 'On The Principles of Political Economy and Taxation'... I agree with you about the 'colonial arrogance' bit — but the demographics have shifted a bit in 188 years, too!

When you say that you think that 'incomes in the west will be influenced by globalisation', do you mean upwards or downwards?  (relative to the '3rd world'/'emerging' economies)


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## Duplex (18 Dec 2005)

> When you say that you think that 'incomes in the west will be influenced by globalisation', do you mean upwards or downwards?  (relative to the '3rd world'/'emerging' economies)


 
Lets say a leveling, e.g. equally productive engineers in China and Ireland will be paid a similar wage.  Radical idea?


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## DrMoriarty (18 Dec 2005)

'Totally'...!  

I suppose Minister Cowan and his party needn't depend on (y)our vote, at the next election?  

_[Edit: Please don't anyone dive in with the old gag about 'more elections than a Chinaman on his honeymoon'...!]_


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## Duplex (18 Dec 2005)

Doc

In terms of global affairs, I think the Dail has as much influence as a fart aimed at a hurricane.  I’d like to see a Pragmatist Party in the Dail though, Vote Pragmatist.  

What’s the Irish for the Pargmatist Party anyone?


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## Marie (18 Dec 2005)

_*But western consumers have been unable to absorb all the cheap production created in the East and the Eastern consumer economy is still too small and poor to help out.*_

OK!  So I think you're saying the strategy is not working and the contingency then put into operation is flood 'the West' (I'm uncomfortable using that term but the more anthropologically-correct 'late-capitalist Euro-American consumer economies' is a bit OTT) with virtual wealth and the housing market is essentially purchasing a lien on the future - an extension of the 'buy now pay later' credit approach.  If I've understood correctly then pegged interest-rates are a handmaid of that last resort.

Duplex the model of equalisation of reward for equal work doesn't stand a snowball's chance in hell as it leaves out realities such as power politics and fundamental corruption at the base of human nature.


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## Duplex (19 Dec 2005)

> Duplex the model of equalisation of reward for equal work doesn't stand a snowball's chance in hell as it leaves out realities such as power politics and fundamental corruption at the base of human nature.


 
Incomes in the US actually fell last year, (I’ll post a link when I find it) and in Ireland we have the example of Irish Ferries.  Profit maximisation I think will overcome any corrupt human or political influence on this trend of equalisation.   This levelling will take some time and may not result in absolute parity but the momentum created by 85% of the world’s population is irrespirable.  

That trend has started in Ireland if you look at the figures for foreign direct investment over the past few years.  We as a nation need to plan a response for this trend now, rather than waiting for five years and producing some half @rced reactive policies that are behind the game.


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## Protocol (19 Dec 2005)

Marie,

you asked about EMU interest rates, and how they are set.

Well here is a quote from the ECB website:

The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. 

(In plain English, their job is to keep inflation low and stable)

Indeed, they need to act in advance of any possible rise in inflation, and therefore choke off or prevent excessive inflation.

The ECB keep an eye on the money supply, on producer prices, oil prices, and on rates of economic growth, always trying to see what is and might happen to inflation.

Over the past few years the main EMU economies have been weak, with high unemployment and no threat of rising inflation.  So interest rates were reduced to a low of 2% to help these economies recover.  Rates have been at 2% from June 2003.

Now there are signs of recovery, and inflation might be on an upward path, so the ECB have recently raised rates to 2.25%.  Just one increase of a quarter percent.

The US also reduced their rates all the way down to 1% a few years back (2001-2002???) to help the economy out of recession.  During the past year, interest rates have been increased 13 times (13*0.25) back up to 4.25%.

Does that help??

Any more questions??


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## CoffeeBrew (21 Dec 2005)

Might be March for the next hike :



> Euro zone central bank sources told Reuters the European Central Bank would probably raise interest rates by a quarter percentage point in March, using its quarterly economic forecast as a catalyst for tightening.


 

The article also shows a willingness to master the English language  



> "They are very cautious and they have to, as you say in English, 'cover their arses'


 

http://today.reuters.com/business/newsarticle.aspx?type=tnBusinessNews&storyID=nL21531540&imageid=&cap=


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## Marie (21 Dec 2005)

Thanks Protocol.That explains the general EMU thinking.  _However_ the Celtic Tiger has been roaring for a decade now with practically full employment - enough to absorb the Irish who formerly emigrated plus new migrants from the rest of the EU and RoI (or at least, the main cities) has been 'expensive' for hitting a decade also.  Is there a danger when the tide goes out RoI will be left beached given the cost of living has been climbing (but do-able, given the sea of cheap credit) when borrowing begins to cost more, farm subsidies disappear,  demands for productivity kick in, pension benefits disappear and state taxes go up to cover the cost of the SIPPs payouts?


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## coogj1 (22 Dec 2005)

Anyone have a an ECB Dove/Hawk meter in terms of who is a haswk, nuetral, or a dove?  Thanks


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## CoffeeBrew (22 Dec 2005)

If you really wanted such a list and it hasn't been compiled already you could do a google search for each of the 18 members of the [broken link removed]and examine their recent statements.

But to be honest, I don't think it really matters for many of them.
Irish CB Governor, John Hurley, (incidentally, he praised the last rate hike) who is a member of the ECB Governing Council gave some insight into decision making when he used the phrase "forceful arguments".

So I would think what matters is who is making the most forceful arguments and where are they from ?

Right now the hawks are very concerned and, importantly, they are guided by the Germans (Weber and Issing) and also include Trichet.


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## Duplex (22 Dec 2005)

The ECB stated mission is price stability as  mentioned above. In order to achieve price stability the ECB has to target both inflationary and deflationary pressures in the Eurozone economy. 

If you look at the yield currently available on 5, 10 and 30 year Eurobonds you will notice that the risk premium spread between current base rates and long dated bonds is small , very small. If you look at comparative yields on long dated debt in the US and UK you will see the same phenomena. The money markets are betting and betting heavily that inflation is mastered. 

The Bank of England is likely to cut base rates next year in response to slowing consumer spending and rising unemployment, the American Federal Reserve has signalled that it’s rate tightening policy is reaching or has reached an end. The ECB may raise rates to 3% some time next year but the prospects of ECB rates reaching a level that will impact consumer spending to any degree is negligible. 

But low inflation means low incomes growth or even falling incomes i.e. deflation. 

This piece from the FT explains the present cloudy picture in the global economy

http://news.ft.com/cms/s/98ab01a4-6e30-11da-9544-0000779e2340.html


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