Outlook for European Interest and Inflation Rates

Rising inflation rates across Europe, and notably in France, with a 2.3% increase in February alone, are encouraging the European Central Bank (ECB) to increase the interest rates in order to counter these unanticipated levels of inflation. The bank shifted its year-long and its 2012 overall inflation projections.

The interest rate increases are aimed to signal to investors that there is a focus on controlling inflation throughout the Eurozone. The ECB is tightening economic policy as the economy rebuilds and expands. The ECB Governing Council members expressed that monetary policy as it stands is too “accommodative”, thus necessitating the higher interest rates. Further, the rising interest rates are an indication that the economy is strengthening to be able to withstand the shifts in investment that may occur as a result of the changes. Additionally, the increased interest rates are an emphasis on the bank’s credibility.

The problem of balancing stronger economies, like Germany and France, which recovered the most quickly from the financial crisis, with the countries that have required aid in the form of foreign loans or World Bank bailouts remains a challenge for the ECB.

The IMF last week increased its growth prediction for the euro region to 1.6% in 2011 and 1.8% in 2012. The ECB is also trying to emphasize that while the euro’s exchange rate dipped slightly in mid-April with announcements over Greece’s bond rankings they are confident that the sovereign debt crisis, in terms of those countries requiring bailouts, is a restricted situation.

The primary policy goal of the ECB this year is inflation control. The ECB has not explicitly indicated whether its Euribor rate will indeed increase to 1.75%, a further increase of 0.5%, but there are indications that such increases are not out of the question. There is an expected raise in the interest rate by 0.25% each quarter through the end of 2012 so that the interest rate at that juncture would be 2.75%.

According to Business Week, investors in the European market can expect that the bank will be beginning to decrease its supply of liquidity to banks and to perhaps cut down on its bond purchase program as these two policies are not in line with the policies towards lessening dependency on the ECB by member countries.

Why France is still Drawing Expats

A recent survey by the UK Post Office's International Payments division indicates that France is the preferred destination for expatriate relocation, ranking above Spain, the United States, and Australia. In a time of increasing inflation; unemployment and a precarious mortgage market, the stable and indeed strong French property market and French mortgage market seems to continue to draw expats.

Euro Exchange Rate Outlook

The European Central Bank reaction to inflation by increasing interest rates pushed the Euro/USD exchange rate above 1.40 in mid-March. According to RBS, at the end of the second quarter of 2011 the EUR-USD exchange rate will be at 1.38; the Pound to Euro exchange rate is expected to be at 1.18.

France, World Tourism Leader in 2010

Continuing its eight year reign as the most visited country in the world, France yet again claimed the top spot in the annual survey by the UN World Tourism Organization with 78.95 million visitors. Paris was the most visited city in France.

The top four most visited countries in the world in 2010 were:

1. France
2. United States
3. China
4. Spain

Update on the French Mortgage Market

• The French mortgage market is the third largest in the European Union after the United Kingdom and Germany. While the mortgage market in the UK and Spain suffered significantly during the fina ncial crisis, the French mortgage market has remained strong, with limited defaulting. Due to a strict upfront financial analysis for each dossier, French banks have succeeded for the most part in lending what borrowers are able to repay. This has created a great deal of stability for the French real estate market.
• Approximately 80% of properties in France are purchased with mortgage financing.
Mortgage rates in France were at their lowest point since World War II in 2010; in the first quarter of 2011, rates remain at levels lower than historical averages. With interest rates at historical lows in 2010, there was both a greater demand and supply of loans for French real estate purchases.
• According to the European Mortgage Federation (EMF), in France, new lending increased by 38.5% from a year earlier.


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