For some time, investors have been speculating that the European Central Bank (ECB) will need to increase interest rates due to a steady increase in inflation in the Euro Zone. This speculation was confirmed by comments made by Axel Weber, a member of the ECB. He said, “interest rates may need to be raised to contain ‘alarming’ prices.” As a result of these comments, the European 2-year Government Securities dropped. Also, the 2-year German Government securities declined last week, the largest decline in four years. In late Friday’s trading in London, the yield on the 2-year German securities increased by 17 basis points to 3.47%, extending gains made in March to 30 basis points.
Following yesterday’s government report, which indicated that Germany’s inflation rate is above the agreed target, traders started betting on whether or not the ECB will be forced to cut interest rates. Inflation in Germany rose to 3.2%, calculations based on a European Union method, which represents an increase from 2.9% in February 2008.
The consumer-price growth for the Euro Zone in February increased to 3.3%, the highest level in 14 years. According to Weber, the ECB “will act,” if inflation keeps increasing and threatens price stability. He identified several factors of “upside” inflation rates and concluded that pressures on prices are “alarming.”