Thinking About Money

Less than a week ago I wrote about the perfect storm and the failing of the Fed. Based on recent news it looks like the Perfect Storm is starting to form quite nicely.

This time it seems that the European Central Bank or Bank of England might blink. Right now the ECB rates are lower than the US, but the ECB has hinted at many rate increases to come. The reason is plain and simple – most European real estate markets (not the German) are on fire! For example, since 1997 Irish housing prices have increased 197%, French 77%, British 93% and Spanish 130%. For comparison in the same period U.S. housing prices increased on average 83%. The ECB has no choice to increase rates because otherwise there could be hyper-inflation in Europe. One of the side effects of increasing the interest rate is that your currency becomes more attractive for fixed income purposes. Thus your currency will become stronger against other currencies.

So what is the perfect storm from the ECB? Many politicians in Europe are hinting that the ECB and the Bank of England should stop raising interest rates because the Euro and Sterling have become too strong and that is hurting the export business. Will the ECB or BOE blink? Good question. If they do it does not bode well for the economy.

This entry was posted on Monday, July 3rd, 2006 at 12:58 pm and is filed under Trends. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.