Interest rates are forecast not to rise

The European Central Bank (ECB) will not raise interest rates again this year and is unlikely to cut rates until the end of 2008, a senior European investment manager said yesterday.

William De Vijlder, managing director and chief investment officer of Fortis Investments, said rates were unlikely to rise above their current level of 4 per cent while inflation in Europe remained at 2 per cent.

He said inflation would have to rise to 2.25 per cent or there would need to be an external crisis before the ECB needed to move on rates.

"We could very easily have a situation where interest rates stay where they are for a year."

Mr De Vijlder, who is also a part-time professor of economics at the University of Ghent in Belgium, gave an overview on the international financial and investment climate at a briefing hosted yesterday by Postbank, the joint venture between An Post and Belgian bank Fortis. Fortis Investments, part of the Belgian bank, manages assets of €131 billion.

He could not understand why the ECB would raise rates when banks were being forced to increase their own rates due to the high cost of inter-bank borrowing.

"There has been a tightening, not by the ECB, but by the market. On top of that, you have the strengthening of the euro so you already have two elements which weigh on the growth outlook. There is no reason why on top of that you would still hike policy rates."

Mr De Vijlder said a recent ECB survey showed that European banks were facing the tightest credit conditions since 2003 and had become more cautious in their lending.

He expected the US dollar to fall to €1.50 in the first half of next year. Eurozone growth had peaked, and the ECB now had a less upbeat economic outlook.