Interest rates likely to peak at 4.25%

EUROPEAN interest rates are set to hit a six-year high today despite the strong differences emerging over interest rate policy.

It is expected ECB president Jean Claude Trichet will announce a further 0.25% rate rise to 4% with most analysts expecting yet another hike to 4.25% by September.

Some have not ruled out one further hike to 4.5% before the year is over.

Leading Irish economists including Alan McQuaid of Bloxham Stockbrokers and Dan McLaughlin of Bank of Ireland fear rates could hit 4.5% by the end of the year, despite evidence the eurozone economy has peaked.

As the row over interest rates gathered pace, Mr Trichet was forced yesterday to deal with criticism from Nicolas Sarkozy, the new president of his native France, who has said rate rises have gone far enough.

He has the backing of the Italian Central Bank and the stand off should widen the debate on how the ECB determines interest rate policy, said Mr McQuaid.

Strong money supply growth in Europe is worrying the top brass at the ECB who fear it will drive up inflation, which has been below the 2% ECB target for the past eight months.

Mr Trichet has the banking of the influential German Bundesbank and analysts expect interest policy to reflect their concerns for the rest of 2007.

But Mr Trichet’s view on the role of money supply is being questioned by Christian Noyer, 56, who succeeded him as governor of the Bank of France and who also sits with him on the bank’s governing council.

In the short term the hawks are likely to win the day and rates are set to rise in the coming months.

Dr Dan McLaughlin said today’s meeting could provide some clues about the future direction of rates.

If the hawks insist further vigilance is required we can expect another rate hike in the Autumn.

On the other hand if the “tentative signs” that Europe’s economic cycle has peaked are acknowledged by the ECB, it could imply Mr Trichet is prepared to adopt a wait-and-see attitude before raising rates further.