The Reaction of the Markets to the Step of ECB to Raise Interest Rates Term Paper

The Reaction of the Markets to the Step of ECB to Raise Interest Rates - Term Paper Example According to the monetary theory, the reverse effect should have taken place- the prices of the bond should have been decreased, whereas euro should have appreciated. However, this reaction can be explained by the fact that Mr. Trichet-the president of ECB reiterated that the latest move of the ECB should not be treated as an indication of the policy of high interest rates. The reaction of the market that followed can be explained by the confidence of investors in a more cautious approach of ECB, as the appreciation of the Euro ceased after new announcements of Mr. Trichet. After all, there is little doubt that the financial experts of ECB do not realize that high-interest rate of ECB which might entail appreciation of Euro and tightening of available pools of credit may hamper economic growth in the European area. This step can be viewed as an attempt (apparently temporarily) to combat the high level of inflation. It is too early to say whether this decision will seriously affect economic growth in European countries. According to OECD, the raising of interest rate could wait until the middle of 2006 when more robust economic growth is expected. However, countries of EU differ in economic, financial and political terms, with weak growth in Germany and France and stronger one in Spain and Ireland; after Maastricht agreements, none of the countries mentioned has the opportunity to regulate the growth in the country by traditional methods of the money supply. Overall, the economic growth in the European countries was less than in the USA (4.3% in the USA against 2.6% in the countries of European Union) and it affected major industrial nations of the EU. If the trend of appreciation of the Euro currency continues, it may hamper export- one of the vital elements of economic recovery in European countries and reduce the long term competitiveness of European companies.