Euro-zone inflation risks "have not diminished" in recent months and the European Central Bank hasn't signaled that interest rates are close to peaking, European Central Bank Governing Council member Klaus Liebscher said.
The comments arrived as surveys of purchasing managers working for service providers and manufacturers showed the euro-zone economy continued to expand at a rapid pace in March, and the remarks implied that the central bank is likely to raise interest rates at least one more time this year.
"We will say that [rates are close to a peak] when the time comes," Mr. Liebscher, who is also the governor of Austria's central bank, said in an interview. He reiterated that interest rates are moderate and monetary policy is still supporting economic growth.
There are two reasons why the levels of various regions interest rates are important. The first is the carry trade. A "carry-trade" is an eco-geek way of saying, "borrow money in a region where interest rates are low and lend in regions where interest rates are high." Secondly, interest rates are important for currency traders. If a currency has a higher interest rate, traders will consider that currency more valuable. Some traders invest their currency holdings in that currencies interest rate investments.
Higher inflationary pressures mean higher interest rates. Higher interest rates mean a more valuable currency.
Also remember, there is slow global move to diversify currency reserves from dollars, primarily in euros. As European interest rates increase to stave off inflationary pressures expect this move to continue.
The following graph is from Barron's "The Current Yield", a weekly column on the bond market.
