Financial Market

Interest rates for the Eurozone were today raised to 4.25%, the first Eurozone interest rate rise in twelve months, in a move aimed at tackling record levels of inflation which this week hit 4%.

Rising food and fuel costs resulted in the European Central Bank raising its interest rate, a move which is thought could further weaken the dollar which is currently at a two month low, and lead to further increases in the trading price of oil.

In anticipation of the ECB’s rate increase, oil hit new record highs today, with Brent crude topping $146 a barrel for the first time.

The interest rate increase comes amid concerns that the eurozone economy is slowing and there are further concerns that rate hikes could slow the economy further.

“Today’s ECB interest rate hike underlines the bank’s determination to bring inflation down, even amid plain evidence of slowing gross domestic product growth” - Jennifer McKeown from Capital Economics.

Within the eurozone it was Spain who announced figures that suggested it is heading for recession with it service sector showing significant signs of retraction.

Other leading banks have also warned that It also signalled that more interest rate rises could be on their way if world oil and food prices continued to rise.

Days after HSBC announced more writedowns as a result of the sub prime market, Barclays announced it has taken a further £1bn writedown on assets and confirmed that profits will be lower in the first quarter of 2008 than in the same period last year.

The announcement on profits was made after warnings that tough trading in its investment banking division Barclays Capital would cut group profits.

I reaction to similar news other banks including Royal Bank of Scotland, HBOS and Bradford and Bingley have asked shareholder to for extra cash in order to repaid the credit losses. Barclays on the other hand have not asked for any additional funds from shareholders.

“It [Barclays] maintains that it will continue to monitor all options and will clearly not be drawn on speculation as to what form this capital injection might take.” - Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers,

This week major global bank HSBC announced new write-down figures as a result of their exposure to the sub-prime market.

It was reported yesterday that Europe’s biggest bank announced that it had written off £1.6bn in debt provisions for losses against mortgages, credit cards and other loans to U.S. consumers.

The write offs were lower than those in the last quarter of 2007 and were in line with predictions, however many the lower write off could have been due to seasonal factors such as tax refunds being used to repay debt rather than any underlying improvement.

“I don’t see [US] real estate prices changing from where they are now until well into 2009… We don’t think it is a spring 2008 event; we think it is a 2009 event.” - Michael Geoghegan, HSBC’s chief executive

With these latest write offs HSBC took its amount of write downs to £7.5bn over the past year, standing forth in terms of the largest write down figures behind Citibank, UBS and Merrill Lynch.

At the same time it was announced that a further $2.6bn was being written off in the company’s banking arm.

It has long been the case throughout the sub-prime mortgage crash that a strong Asian arm has helped to counter the hit taken on US home loans, meaning resulting profits were still higher than this time last year.

“I am encouraged by the way we have increased pre-tax profits in every one of the major countries in which we operate in Asia-Pacific, the Middle East and Latin America,” - Michael Geoghegan, HSBC’s chief executive

News broke today that the Britain’s biggest bank are preparing themselves for a high court defeat in the test case over overdraft charges.

On Thursday a judgement is expected which will determine whether or not the Office of Fare Trading can rule excessive banks charges as unfair.

If the OFT wins then it is expected to decide that charges imposed by banks on overdrafts are in fact too high and therefore unlawful.

Since the issue came to light in 2006, hundreds of thousands of bank customers have attempted to reclaim banks charges on the ground they were too high and unfair.

Due to the amount of cases that were taken to court both the OFT and the banks agreed to stage a test case that has meant putting on hold tens of thousands of claims.

“A decision in favour of customers would be massively significant. Public confidence in the banking system is at an all-time low,” said Marc Gander of the Consumer Action Group.

An estimate on the BBC website stated that in 2007 around £748m was refunded to nearly 378,000 customers throughout the UK.

It was in July last year that it was agreed that the test case would go ahead after the OFT agreed a deal with Seven banks and the Nationwide building society. Consumer group Which? Has outlined the three possible outcomes of the case.

An outright win for the OFT. The court could rule that all terms and conditions for all the test case banks over the last 6 years can be assessed for fairness.

An outright win for the banks. The court could rule that none of the terms and conditions used by any of the test case banks over the last 6 years can be assessed for fairness.

Something in between. The court might decide that some terms and conditions are subject to fairness assessment, while others are not.

Whatever the outcome Which? Admitted that this case will not decide whether charges for overdrafts are in fact fair or not.