The euro zone's improving jobs picture and worsening inflation prospects are raising the chance that the European Central Bank (ECB) will increase interest rates by a half a percentage point in June, latest trends in money markets suggest.
Financial markets yesterday reacted to data showing that unemployment in the euro zone had fallen in March to 8.1 per cent, its lowest level in more than four years. The EU's statistical agency Eurostat yesterday also released producer price inflation figures for March, showing energy prices continuing to affect inflation in the 12-member currency union.
Meanwhile, the Institute for the German Economy - a government-funded think-tank - yesterday upwardly revised its forecast for Germany's economic growth this year to 2 per cent, compared with a 1.5 per cent forecast in November.
"While the decline in euro-zone unemployment over the past year exaggerates the improvement in the region's labour market, there are now increasing and very welcome signs that the labour market could be starting to see genuine modest improvement," Howard Archer, chief European economist at Global Insight, said yesterday.
Although somewhat offset by recent euro strengthening, traders reacted by betting that the latest data would toughen the ECB's position on interest rates.
Following remarks by ECB president Jean-Claude Trichet last month, interest rates are expected to remain unchanged when the ECB governing council meets in Frankfurt today. But prices quoted yesterday for Euribor futures contracts of three months maturity imply that traders expect the ECB's key main refinancing rate to rise from 2.5 per cent to at least 2.75 per cent at the council's subsequent June meeting.
The price of this derivative moves inversely to expected future interest rates and the latest prices also imply that traders attach a one-in-four chance to rates rising by a half of a percentage point in June.
Prices quoted for longer-term Euribor contracts imply that interest rates will end the year three quarters of a percentage point higher than now.
