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August 09, 2011

European Markets Boosted by US Rate Announcement

European stock markets appeared to welcome the news that the U.S. Federal Reserve plans to keep interest rates low for at least two years, but analysts say the situation remains highly volatile.

The U.S. central bank said Tuesday it would maintain “exceptionally low” interest rates at least until 2013. That appears to have rallied European markets.

Analysts across Europe said the pledge to keep interest rates low in the United States is good news.

Long-term concerns remain

But Robert Halver, a trader at Germany's Baader Bank, said the announcement was not enough to ease long-term concerns.

“We have a guarantee. Two more years of low interest environment in America. It’s a wonderful cushion, but it’s not sufficient to calm the markets, we need a political solution to the worldwide problems,” he said.

Halver said the markets are likely to remain unsteady until the political climate becomes more clear.

"I guess very important is that politics is able to find solutions for the debt crisis and for economic perspectives, right now in America, in the eurozone I find no clear solution for the problems we are facing each day," said Halver.

Slow global growth

The Paris-based Organization for Economic Cooperation and Development [OECD] said this week that most of the world's largest economies are heading for a period of slower growth. The Federal Reserve also said it is concerned about slow growth in the United States.

Last week the U.S. credit rating was downgraded, and some analysts worry the biggest economy in the world could be heading back into recession.

Olivier de La Ferriere, a fund manager in France, said slow economic growth means the markets will remain timid. The environment, he said, is uncertain.  

In Europe, an ongoing government debt crisis is a big part of the problem. Three countries, Greece, Portugal, and Ireland, have been bailed out by their euro neighbors to avoid defaults on their debts.

Watching Europe's debt crisis

Some fear Italy and Spain, two of Europe’s larger economies, could be heading in the same direction.

Eurozone countries, led by Germany and France, have stepped in to help their ailing neighbors. And on Monday the European Central Bank bought billions of dollars worth of Spanish and Italian bonds after they were shunned by private investors.

Investors say economic decisions that come after bitter political wrangling help create a climate of uncertainty.

Howard Wheeldon, a London-based investor, said what is needed is an overhaul of the way the eurozone and the single currency works.

“Quite simply, unless we have forward thinking ideas and acceptance that the euro in its present form, the single-currency experiment if you want to call it that, has actually failed, we need to rethink a way forward,” he said.

Until politicians make a clear commitment to do so, he said, markets will remain volatile.