Odds of interest rate rise shortened

THE odds of an ECB interest rate hike to dampen the Christmas spirit have shortened considerably leading economists warned.

Ulster Bank Markets economist Niall Dunne said there was an eight-in-10 chance the ECB will hike rates 0.25% when it meets in early December.

His view is shared by Austin Hughes of IIB Bank. High inflation, accelerating borrowing and improving economic sentiment give ECB hawks more ammunition, he said.

Previously Mr Hughes firmly believed the ECB would not raise rates before the middle of next year.

Because core inflation was low apart from oil price pressure, and because economic activity in the zone was still fragile, he thought the ECB would hold firm on an interest rate hike for some time to come.

He still believes no compelling case exists for rates to be raised at this time.

What has changed are the increasingly loud noises coming from ECB sources that inflation is a growing threat to economic stability.

And because “they own the ball” Mr Hughes now thinks the bankers will do the deed in December and raise rates by 0.25% to choke off any further threat to EU inflation, currently running at 2.5% and 0.5% above its targeted level.

Mr Dunne’s rationale is that because political voices have been raised against a rate hike, including that of Finance Minister Brian Cowen, who said after an ecofin minister’s meeting yesterday that a rate rise was not required.

Such interference from the politicians is like a red rag to the central bankers, Mr Dunne said.

And the ECB, ever mindful of its independence, could well raise rates just to affirm that point.

It has got to the point in Europe where everyone from trade unionists to ministers of governments have urged the ECB not to put up rates to avoid damaging economic recovery.

That is the real fear in Europe, but the need for the ECB to assert its independence may scupper the chances of rates staying at historic lows, he said.

Jim Power of Friends First who published his company’s quarterly economic review yesterday, expects the ECB not to interfere with the current 2% key European interest rates just yet.

But with growth picking up rates will be increased from April/ May 2006, he said. He is forecasting rates to rise 0.5% in 2006 while acknowledging that markets are expecting a hike of 0.75% over the 12 months.