13/02/07 - Eurozone Interest Rates Held

Last year, the eurozone experienced six rises in interest rates up to December 2006. But this month, the European Central Bank (ECB) has decided to keep interest rates unchanged at 3.5%.

The ECB's decision to freeze rates followed a similar decision by the Bank of England which kept UK rates on hold at 5.25% for another month. Eurozone interest rates have always been historically lower than pound sterling rates since the euro's launch at the beginning of 2002.

But euro rates expected to rise next month

However, following the recent announcement, ECB President Jean-Claude Trichet said "strong vigilance" was needed to avoid "risks to price stability".

The big eurozone economies have started 2007 strongly. In spite of Germany's decision to increase VAT from 16% to 19%, consumer confidence is strong and unemployment is falling both there and in France. Wage pressures are building and there is particular concern over the threat of inflation caused by the latest round of pay negotiations with Germany's IG Metall union.

Given the looming risk of inflation, many economists now believe that eurozone rates are likely to rise to 3.75% in March.

"Judging by the prepared statement, the ECB seems to have strengthened its hawkish language, warning more explicitly than it had done in the past about upside risks from wages and stating explicitly that they will watch the current wage negotiations carefully," Sandra Petcov, an economist at Lehman Brothers, told the BBC. "Together with the use of the phrase 'strong vigilance', a rate hike in March seems like a done deal."