European interest rates face 0.25% hike within six months, warns economist

EUROPEAN interest rates could face a hike of 0.25% within six months, a leading economist warned yesterday.

The same forecast also envisages the euro gaining strongly against the dollar to end the year at $1.32 back where it was at the start of the year.

Ulster Bank warns in its mid market “Outlook” that despite rising oil prices and a slowdown in eurozone growth, the ECB could be forced to raise rates to counter inflation pressures due to the oil surge.

Economist Niall Dunne believes the British economy is slowing and this will lead to the euro rising to 72p in the coming months as the Bank of England is forced to cut rates further to halt the economic slowdown highlighted by the dip in consumer demand.

Overall, Mr Dunne says the rising oil scenario is damaging the outlook for growth which will slow down in the months ahead unless the outlook for oil prices changes significantly.

In all of this Mr Dunne says the US is paramount.

In his view it has led a charmed existence for the last six months, which he believes could come to an abrupt end.

Even with rising deficits, soaring energy costs and a lacklustre labour market, the US economy has come through its soft patch and is currently growing at a faster rate than normal.

Risks remain, he warned, that could threaten the current fairytale existence for the group.

An oil-fuelled downturn in US consumer confidence could have bearish repercussions for the dollar if economic growth slows, while increasing energy costs could add to the US trade deficit woes which could also impact on the dollar, he said.

China’s recent currency revaluation could also hurt the dollar, and overall Mr Dunne believes the US outlook is more negative than positive at this time.

“We see the euro rising to $1.32 by year end,” he said.

Those with dollar exposure might consider hedging at current levels to avoid any capital losses, he said.

The Ulster Bank’s Outlook also warns eurozone interest rates could catch up with the Bank of England’s monetary policy.

The ECB could paradoxically be forced to tighten euro interest rates, even if oil prices rise further and the eurozone economy fails.

“We look for a 0.25% point hike in the next six months,” he said.

This is contrary to what a lot of commentators have been saying to date.

They have argued that the ECB was unlikely to raise rates until the second half of next year given the poor state of the eurozone economies such as Italy, France and Germany.