The ECB decides tomorrow: what it means for your money
In short
- The European Central Bank announces its rate decision tomorrow, 29 October. 70 of 73 economists in a Reuters poll expect a hold at 2.50%.
- Euro-area inflation is 3.8%, and markets price in about 0.70 percentage points of hikes over the next 12 months.
- The decision moves the euro against the pound – and with it holidays, euro loans and the price of gold in euros.
Tomorrow the European Central Bank decides on interest rates. It is not the Bank of England, but it sets the price of money for 20 countries and moves the world’s second-largest currency.
What is expected
According to a Reuters poll, 70 of 73 economists expect the ECB to keep its main rate at 2.50%. The problem is inflation: in the euro area it is 3.8%, far above the 2% target, mainly because of expensive oil.
That is why markets are already looking ahead. According to TIOmarkets, financial markets price in about 0.70 percentage points of hikes over the next 12 months. Tomorrow the words of Christine Lagarde matter more than the numbers: will she hint at a hike in December?
What it means for you
Today one euro costs about £0.84, so €1,000 of holiday spending is about £837. Higher euro-area rates usually make the euro stronger, which makes European holidays, goods and property more expensive in pounds.
The maths: If you have a euro mortgage on a property in Spain, France or elsewhere in the euro area, your floating rate follows euro market rates. On a €100,000 loan, every 0.25-point change is about €250 a year, or about £209. If the expected 0.70 points of hikes happen, that is about €700 a year, about £586.
The decision also affects gold and European stocks. A stronger euro usually makes gold cheaper in euros, while the DAX and the Euro Stoxx 50 react to every hint about rates. See live prices on our stocks page and gold charts.
Bottom line
Tomorrow the rate is almost certain to stay at 2.50%. What matters more is the message about December. With inflation at 3.8%, markets already expect hikes, and through the exchange rate they reach anyone who spends, borrows or invests in euros.
Sources: Greek City Times (Reuters poll) · TIOmarkets
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