‘ECB to raise interest rates soon’

EUROPEAN interest rates are set to rise sooner rather than later, according to leading Irish economists.

IIB Bank chief economist Austin Hughes said yesterday there is a greater chance of a December ECB rate hike than the markets currently envisage.

He said stronger consumer spending in the US will become established over the critical Thanksgiving/Christmas period and this will cause an eventual rebound in term interest rates in the US and elsewhere.

“While the US outlook is critical to the prospects for the global economy, the tone of recent ECB comments has been notably different to those emanating from the US or the UK.

“It has been clear for some time that ECB officials have become more confident about Euro area prospects and more concerned about inflation prospects of late.

“ECB President Trichet’s remarks to the European parliament continue this divergence.”

“So, he may feel a need to prepare that audience for the possibility of an interest rate change before his next testimony. These remarks certainly don’t exclude a rate hike in the months ahead.”

“We could envisage that the euro will reach our end year targets of 70p against sterling and $1.25 against the dollar sooner rather than later,” he said.

Bank of Ireland Group chief economist Dr Dan McLaughlin said the interest rate rises in the US, Britain, Australia and New Zealand and a more hawkish rhetoric of late from the ECB suggest that euro area interest rates will rise too, “although the precise timing of the first move remains uncertain”.

Writing in Bank of Ireland Global Markets economic bulletin for September, Dr Mclaughlin said although the market is not pricing in a rise in the repo rate until the first quarter of 2005, the ECB’s rhetoric would suggest that monetary policy will be tightened this year.

“The editorial in the ECB’s August Bulletin marked a shift in tone. The text referred to upside risks to price stability, relating to higher oil prices and the possibility of second-round effects on wages and advised that vigilance was required in relation to inflation expectations. He also said: “The discussion about monetary trends also introduced a new element, with the familiar warning about the amount of liquidity in the eurozone supplemented by a comment on credit growth particularly in relation to mortgage lending, which was deemed ‘rather high’.”

“Since then, data on monetary developments in July, published in late August, showed a further acceleration in mortgage lending, to an annual 9.2% from 9% in June.”

“This may not seem excessive in an Irish context, but masks strong growth in a number of the larger economies as the aggregate figure is depressed by weaker lending growth in Germany,” he said.