Top economist warns rates will rise 1%

INTEREST rates will rise by close to 1% between now and the end of 2006, a top economist warned yesterday.

The moves by the European Central Bank will start early next month with a 0.25% increase and there will be further rises in 2006, said IIB Bank's chief economist, Austin Hughes.

The increases will rob the consumer of €1 billion in spending power, but they will not be enough to undermine the economy or the housing market.

It "won't cause the Irish building industry to buckle," said Mr Hughes.

And he argued the injection of SSIA savings into the system next year will more than offset any damage done by higher rates.

With the continuing boost to demand from a surge in immigration factored in "this means the market, as a whole should remain solid in the coming year," he said.

Speaking at Gypsum Industries seminar he said "a sequence of interest rate increases could hit the purchasing power of many borrowers" who should prepare themselves for the changing lending environment.

The base rate of 2% should rise to just under 3% by end next year as the ECB introduces a series of hikes to curb price inflation in the system.

The ECB inflation rate is currently 2.5%, 0.5% above its mandated target.

Mr Hughes expects the first rate rise in early December when the ECB meets to decide interest rate policy.

Looking beyond this he said: "History suggests is most unlikely that it will be a case of 'one and done' when borrowing rates rise next week."

However, a still sluggish Eurozone economy means rates won't soar higher.

"We think they should end 2006 just below 3%," said Mr Hughes.

Most economists believe the EU will not overdo the increase in rates bearing in mind the delicate nature of the economic recovery currently underway.

"How painful the consequences of higher rates prove to be could depend in no small way on what offsetting measures are introduced in the upcoming budget. What the European Central Bank takes away could be given back by an Election-Conscious Budget," said Mr. Hughes.

"A sensible package of measures from Mr Cowen that provide relief on childcare costs and more broadly based concessions on income tax should underpin sentiment towards the economy as a whole and the property market in particular," he said.