B of I bulletin revises rates forecast

Bank of Ireland has revised its rates forecast and says it now expects the ECB repo rate to rise from 3

Bank of Ireland has revised its rates forecast and says it now expects the ECB repo rate to rise from 3.5 per cent in December to 3.75 per cent in March next year.

Commenting on the publication of the November Bank of Ireland Global Markets Research Bulletin, B of I chief economist Dr Dan McLaughlin said he had changed his forecast in light of bank lending in the euro zone, which has yet to slow.

"It would now come as a major shock to the financial markets if the December 7th meeting in Frankfurt did not deliver another quarter point increase in the repo rate, as that was clearly signalled at the last policy meeting in early November. This would take the repo rate to 3.5 per cent and bring the total rise in the past 12 months to 1.5 per cent," Dr McLaughlin said.

"There is more uncertainty about the likely path of rates beyond December, although the financial markets are now fully pricing in a repo rate of 3.75 per cent by the spring."

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"Economic growth in the euro area did slow in the third quarter, to 0.5 per cent from 0.9 per cent in Q2, but this was from elevated levels and still left the economy growing at a pace around its long term trend."

The economist said the recent weakness in oil prices also provided "food for ECB thought", as it helped propel euro zone inflation down to 1.6 per cent in October from 2.5 per cent in June.

"A weaker profile for oil prices argues for a lower inflation trend than expected a few months ago, but this, in turn, may help to boost consumer spending and hence bolster economic growth in the coming year, so the implication of lower oil prices for interest rates is ambiguous."