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Currency Exchange Rates - Pound Euro GBP EUR Trades Down On ECB Interest Rate Hike

April 8, 2011 - Written by John Cameron

The Pound Euro exchange rate (GBP/EUR) is 1.1384. The Euro Dollar exchange rate (EUR/USD) is 1.4417.

The European Central Bank raised its headline lending rate form 1.00% to 1.25% yesterday under a backdrop of continuing Eurozone sovereign debt concerns.

Portugal’s ongoing debt crisis came to a head just a few hours before the rate hike, when the stand-in Portuguese Prime Minister, Jose Socrates, announced that the debt-addled Iberian state would be seeking an ECB bail-out. European Finance Ministers meet later today to thrash out the details of the deal, with some commentators predicting that the UK may commit to up to £4Bn in loan guarantees on Portuguese debt.

ECB President Jean-Claude Trichet alluded to debt problems in Portugal, Greece and Ireland during his post-announcement press conference, when he stated that "the hike is unwelcome for peripheral countries, but arguably the core member states were in need of this move already some time ago."

Many analysts fear that the interest rate hike combined with stringent austerity measures may lead to mass unemployment and a contraction in economic growth in Eurozone bail-out countries.

It appears that the ECB Governing Council placed fears of rising prices in Germany and France ahead of concerns over growth fears for minor states with yesterday’s monetary policy decision. This has caused commentators to raise concerns about potential long-term political fissures in the Eurozone.

For now though, it appears that Trichet’s hawkish stance on monetary policy has been watered down by recent events in Portugal, Ireland and Greece and by fears over future funding problems in Italy and Spain. This change in tack was emphasised when Trichet concluded that, "we did not decide today that it was the first in a series of interest rate increases."

The Euro made limited gains in the immediate aftermath of the decision and Trichet’s press conference, with the GBP/EUR rate trading up down by around 40 pips between the announcement and the European close.

However, with UK inflation heading towards 5% and the price of a barrel of Crude Oil reaching its highest ever Sterling-denominated level this week, it is possible that the Bank of England may adopt a more hawkish stance on monetary policy in coming months. This, combined with a need for the ECB to keep Eurozone rates low in order to assist bail-out countries, could spark a recovery for GBP/EUR.

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