Rate futures lift as Eurozone sticks with loose policies

Julian Harris
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EUROZONE interest rate futures rose yesterday after the central bank held rates at a record low of one per cent, and avoided making hawkish noises.

While warning that inflation could remain above the European central bank’s (ECB) two per cent target for most of 2011, medium run expectations remain “firmly anchored,” it said. Euribor futures rose across the 2011-12 strip, implying a fall in future interest rate expectations.

In his statement, ECB president Jean-Claude Trichet said that downside risks to economic growth meant that exceptionally low interests rates “remain appropriate.”

The announcement followed a boost for the Eurozone’s services industry, which saw its business activity index score revised upwards to a sixmonth high.

The purchasing managers’ index for January came in at 55.9, up from the “flash” estimate of 55.2.

New business growth and future expectations also improved in January.

Yet recovery in the single currency area remains extremely uneven, with core economies in Germany and France storming ahead, and continued slumps in Spain and Italy.

In Germany, service sector business activity almost hit a survey record high, yet “lacklustre performances and job losses were seen in Italy and Spain,” the report by Markit said.

“The divergence looks likely to remain a headache for policymakers at the ECB in attempting to juggle rising inflation against the ongoing plight of struggling peripheral countries,” said Markit economist Chris Williamson.