BoI sees rates rising later in 2004


The ECB is likely to begin raising interest rates by the end of the year as the euro zone's sluggish recovery gathers pace, according to Bank of Ireland economist, Dr Dan McLaughlin.

Writing in the Bank of Ireland Global Markets Economic Bulletin for July, Dr McLaughlin says that although the euro zone has lagged behind the global upturn, growth is strong enough to meet ECB forecasts, which could trigger a half-point rate rise by the end of the year.

Asia is leading the economic upswing mainly due to the Chinese economy which grew by 9.8 per cent in the year to the first quarter, and 9.6 per cent in the second. Japan is also growing above trend, while in the United States, the annual growth rate is running around 5 per cent, again well above potential.

"Indeed, such is the strength of activity across the globe that one can substitute the word 'boom' to describe the situation, rather than 'recovery'," said Dr McLaughlin.

In comparison the euro zone economy expanded by a mere 0.6 per cent, pulling the annual rise up to 1.3 per cent. However the euro zone's bigger economies, France and Germany, are showing signs of accelerating growth.

"The upshot may be that euro zone growth could well emerge at or above the 1.4 to 2 per cent range forecast by the ECB in June.

Good news on growth is also a necessary condition for any upward move in rates, as it is unlikely the ECB will tighten until above trend growth is clearly visible.

The recent acceleration in growth is therefore consistent with a rate rise by the ECB in the final quarter of 2004", concluded Dr McLaughlin.