ECB set to become hawkish on rates

The European Central Bank meets on Thursday amid rising expectations that, even if it does not raise rates, its language will indicate that a rate-rise is coming before the end of the year.

The ECB has kept the main interest rate unchanged at 2% for over two years. IT is currently 125 basis points (1.25%) below the equivalent rate in Cyprus.

But inflation in the eurozone hit 2.5% in September, above the target of 2% and business confidence indicators suggest that the eurozone economy is recovering.

Last week Deutsche Bank reported third-quarter profits well ahead of expectations. GDP figures for the third quarter, due out on November 15, are expected to influence the ECB’s decision.

A rise by the ECB may not imply a rise by the Central Bank of Cyprus, however.

At the last Monetary Policy Committee meeting of the Central Bank of Cyprus, two of the five members voted in favour of a rate-cut.

However, as the statement accompanying the decision to keep rates unchanged referred to the wait and see stance of the ECB, this could mean that the Central bank will decide to keep Cyprus rates on hold when the ECB raises, thus widening the spread from the current 125 basis points.

Markets are also expecting a rise by the US Federal Reserve in the near future, following strong growth figures and rising inflation.