ECB will keep rates on hold, economists

INFLATIONARY pressure in the wake of the oil price shocks could put added pressure on the European Central Bank to raise rates in the months ahead.

However, Jim Power of Friends First believes the ECB will resist that pressure if the inflationary figures worsen as a result of oil going over $60 per barrel in the past week.

While a hike in ECB interest rates might be a natural follow on from the oil price hikes, economists doubt Europe's central bank will be forced to act in the short term.

Alan McQuaid of Bloxham Stockbrokers, writing in his latest economic review sees the next interest rate hike coming in the middle of next year. He predicts it will be upwards.

The ECB clearly stated it believes the current level of interest rates are appropriate, but the underlying tone of its recent statements suggest the next move will be a tightening and not an easing, he said.

In the long term, the soaring oil price will be deflationary because it will dampen economic growth and induce deflation, said Mr Power.

The ECB has moderated its stance on inflation and has taken into account the poor growth level in Europe, he said. Those who fear an interest rate hike any time soon are worrying needlessly, he added.

In Europe the inflation rate has tended to be above the key 2% level for some time, but the ECB has held rates at the 2% level for over two years.

On the other hand it has also refused to cut rates when confronted with the very poor growth figures of the past two years, believing that a cut of even 0.5% would do little to boost the flagging economy.

Interest rates are at 60 year lows and cutting further would make no difference the ECB has decided.

Europe's predicament stands in stark contrast to the US. There the US Federal Reserve has hiked up rates to 3.5%.

This was the 10th successive hike and the US Federal Reserve has pushed up rates by 2.5% over the past 14 months.