Rates to ease off ‘at end of year’

FALLING oil prices look set to lower EU inflation and may cause rates to peak at 3.75% in the New Year.

Economists believe that a further interest rate hike in December looks inevitable.

They are less certain about rates being hiked again in early 2007 to 3.75%.

If they are raised again by the ECB, Goodbody Stockbrokers chief economist Dermot O’Leary says that will definitely be the end of the rising interest rate spiral.

German economic growth is likely to fall sharply in 2007, putting an end to rising rates for some time, he said yesterday.

However, given the intent of the ECB to keep inflation under its thumb, a further hike in 2007 cannot be discounted, although the fall in oil prices and the easing in growth in Europe would justify such a view, Mr O’Leary said.

On October 5, 2006, the ECB raised rates for the fifth time in 10 months and one more push of 0.25% in December to bring rates to 3.5% could end the surge in rates that began in December 2005 when they stood at an historic low of 2%.

Austin Hughes, chief economist at IIB Bank, said we had to pencil in a further hike of 0.25% for December 2006. By the end of the year, the spate of increases will have added €1.8 billion to the cost of mortgage repayments, he said.

Looking beyond December, Mr Hughes said the inflation outlook over the next 18 months was more benign and that it should ease pressure on the ECB to keep raising rates.

With the US in the middle of its current growth cycle it will have less of an impact on eurozone inflation which also paints a more positive outlook of the ECB interest rate outlook.

Also as rates move closer to a more neutral level, Mr Hughes argues that the case for more aggressive tightening by the ECB was no longer justified.