| Jean-Claude Trichet |
"This monetary tightening should continue to flatten the European curve," Goldman predicts, "as foreign demand for treasuries is concentrated in the front end of the curve, and more competition from Europe for global savings should have a flattening effect."
The rate increases are based on a quarter-to-quarter decline in real GDP growth to .03% from .06% in Q3, according to a transcript of Trichet's announcement. Trichet quickly added that economic indicators suggest an economic recovery is on the horizon, as "the external environment remains favorable, providing support for euro area exports.
Alan Wilde, director of fixed income and currency for Baring Asset Management issued a similarly positive reaction to the announcement saying the increase to 2.5% is "in line with the firm's view that the Eurozone economy is showing classic signs of a recovery." In a statement, Wilde added that "as long as there are no surprise data setbacks from Germany, France, and Italy over the next month or two, we feel that the Eurozone will have successfully crested the hill toward recovery."
Though the markets are anticipating another rate hike, Trichet declined to offer projections on whether the ECB would continue to raise rates, saying "we do not engage a priori in a series of rate hikes." Wilde expects rates to hit 3% by December. "Data appears good from across the Continent, especially from smaller countries like Ireland, and the Benelux countries," he noted.
On this side of the pond, the U.S. yield curve remains inverted.
