Rates ‘could rise to 5.2%’

BORROWERS could face interest rates as high as 5.2% later this year, an analysis of the European Central Bank’s economic predictions indicate.

In a review of the ECB’s staff forecasts outlined yesterday in the Frankfurt-based bank’s monthly bulletin, JPMorgan chief European economist David Mackie said their implication is that the key rate reaches 5.20% by the end of next year from the current 3.75%.

Mr Mackie said the data may point to its benchmark rate moving “way beyond” 4%.

“Growth remains above potential so capacity utilisation continues to rise and core inflation is gradually picking up,” Mr Mackie said.

“The clear implication is that if the ECB staff forecast is realised then the policy rate will need to move beyond 4%, possibly quite a way beyond,” he said.

The ECB is predicting growth of around 2.5% this year and 2.4% in 2008 with inflation of 1.8% in 2007 followed by 2%. The bank assumes the euro will hold around $1.30 and that oil prices will average $59.90 a barrel this year and $63.40 next year.

However, the ECB believes interest rates are still supporting economic growth.

“Given the favourable economic environment, the ECB’s monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate,” the bank said in its monthly bulletin yesterday.

“Acting in a firm and timely manner to ensure price stability in the medium term is warranted,’ the banked warned.

The ECB has clearly indicated it wants to contain inflation in the 13-nation euro region by removing “monetary accommodation”, taking rates to a level that no longer stimulates the economy.

Additional reporting by Bloomberg