May 9, 2008 | posted by Michael Baxter in Eurozone, rate of interest |

If its public are waiting for the European Central Bank to do some kind of a U-turn, and slash rates, then the bank may well want to use these words, borrowed from a certain former British female Prime Minister, “You turn if you want to, we are not for turning.”

Actually, the ECB’s president was a little more prosaic than that, “There’s absolutely no reason to say that vigilance has disappeared from our potential vocabulary,” he said.

The ECB is still fretting about inflation: “Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices,” said an official statement, and inflation should stay “high for a protracted period of time.”

As a result of that the ECB kept rates on hold again yesterday; they have now been at 4 per cent for over a year.

The general feeling is that rates will fall later this year, but by then the Bank of England may have cut rates once or even twice, which in turn will put the pound under further pressure.

But at the moment, the actions of central banks in setting interest rates seem less relevant than they used to. What matters is the money markets.

And here’s something interesting:

For while the cost of borrowing has not really changed that much across the Eurozone since the onset of the credit crunch, in Germany interest rates on fixed rate mortgages have fallen by 30 basis points, while in France they have risen by around 50 basis points. Rates have risen in Spain and Italy too, although not by so much.

Why is that? Capital Economics puts it down to the strength of the housing markets in the respective economies. “Germany has not experienced a large increase in house prices over recent years,” said Ben May, European Economist at Capital Economics, and therefore, “there seems little prospect of a housing crash.” He added “German household finances are in good shape too.”

The bottom line, Germany’s consumers are well poised to up their spending; French, Spanish and the Italian, to draw in the purse strings.