June interest rate rise ‘could be the last’

ECB president Jean Claude Trichet is expected to signal a further hike in European lending rates in June when the governing council meets in Dublin on May 10 to consider monetary policy.

If rates go to 4% in June that would represent a doubling of borrowing costs since December 2005 when rates stood at an historic low of 2%.

The June rise could also be the last, said Dr Dan McLaughlin, chief economist at Bank of Ireland Group, even though the markets are still expecting rates to go to 4.25% before the year is out.

Against that global rates look to be very close to the peak of their cycle and by autumn the US should start to cut its rates.

That action will be required to counter the dip in economic growth which has slowed to 2%, well below its trend potential of 3%-3.5%.

Poor housing figures and serious debt issues are a major worry for the US government and the Federal Reserve’s next move on interest rates will be downwards, according to Dr McLaughlin.

The US slowdown was noticeable in the first quarter of 2007 when the economy grew by just above 2% against 3% in Europe.

At this point Europe looks to have replaced the US as the main driver of global growth, he said.

With housing concerns a “drag on the economy” it is possible that US interest rates will be cut from the current level of 5.25% to 4.5% over the next nine months, he said.

Such a move would definitely mark the top of the cycle in the US and that would feed back into ECB interest rate policy from that point on, he said.

What remains to be seen is whether the ECB will pause after June and wait to see what inflation will do from June onwards.

One way or the other there seems little doubt that we are close to the top of the cycle globally and that fact alone will help inject fresh confidence into the Irish property market, he said.

Meanwhile he expects the Bank of England to announce a quarter point increase in official sterling rates, taking the rate there to 5.5% in May.

While the risks to the economy are certainly on the upside, “in our view there are a number of factors arguing against such a move, such as weakening employment growth and a slow down in wage increases”.

On that basis he expects the next hike from Bank of England will also see the end of rates rises in Britain.