German uncertainty may lead to static interest rates

GERMANY’S unsatisfactory election outcome will damage its economic prospects and may force the ECB to leave interest rates unchanged until 2007.

If the economy fails to pick up in the meantime, the euro, already under attack in Italy, could become the scapegoat for problems in Europe, warned Bank of Ireland chief economist Dr Dan MacLaughlin.

From an Irish perspective the news is good because those heavily borrowed on their mortgages can look forward to historic low interest rates for another 15 to 18 months, he said.

The low interest rate outlook will also help further underpin the property market, he said.

“The bottom line is that a weak Germany means low rates and strong borrowing in Ireland,” he said.

In effect, if Germany fails to restructure it will result in a botched policy, with rates too high for Germany and too low for others such as Ireland which could do with higher rates to dampen demand, said Dr McLoughlin.

The German election put pressure on the euro which fell to a seven-week low to the dollar after the inconclusive result and cast a shadow over reform in Europe’s biggest economy, which accounts for 30% of the Eurozone.

The euro stood at $1.2150 by mid-afternoon down 0.7% on the day, after falling as far as $1.2100, its lowest since July 29.

In the oil markets the price of crude oil rose from a six-week low in electronic trading on the New York Mercantile Exchange.

The movement came on speculation that an OPEC commitment to pump at full capacity would fail to raise output enough to meet demand in the event of another Gulf of Mexico hurricane.

OPEC president Sheikh Ahmad Fahd al-Sabah said over the weekend that the cartel, the source of about 40% of the world’s oil, may push production to a maximum in order to take the stress out of the system.

Tropical Storm Rita, near the Bahamas, is forecast to strengthen to a hurricane and head for the Gulf of Mexico, where Katrina slashed US output by more than 25% last month.

Crude oil for October delivery rose as much as

78 cents, or 1.2% to $63.78 a barrel on the New York Mercantile Exchange from a close of $63 on Friday.

Futures have fallen 10% however from an all-time high of $70.85 a barrel on August 30 2005.

Prices dropped 1.7% last week, and were 37% higher yesterday than a year ago.

The prospects of a further hurricane attacking the Gulf is serious bad news and the big fear now is that a severe winter could put supplies under severe strain given the shortage of refining capacity, analysts said.