Rates set to rise to 4% next year

BETTER-than-expected growth figures in Germany for the first three quarters of 2006 have raised the prospect of ECB rates hitting 4% in 2007, pushing them to their highest level in four years.

Rates currently stand at 3.25% and it was expected that the 0.25% hike due next month could see the end of rate hikes for some time, as eurozone growth still struggled to get back to trend.

At worst some analysts conceded rates might to go to 3.75%, but hold at that.

However the surprise jump in Germany’s growth changes the interest rate outlook warned Niall Dunne, financial markets strategist with Ulster Bank.

Early yesterday morning the ECB interest rate outlook darkened as the Bundesbank’s first estimate of third-quarter German GDP was published.

Though the number fell slightly short of consensus expectations at 0.6% against a hoped for figure of 0.7% Mr Dunne said significant revisions to earlier quarters “have changed our perception of German activity”.

Those figures have serious implications for ECB interest rates and Mr Dunne warned yesterday that the surge in growth could impact wage negotiations and force the ECB to rise rates higher than previously expected.

In a separate report last week Bank of America warned that recovery in Europe would be enough to push rates out to 4.25% by the first quarter of 2008.