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Interest rates set to rise but no consensus on fixing rates Back  
Economists responding to FINANCE’s autumn forecasting survey have reduced their predictions for Eurozone and UK interest rates from the last survey, which was conducted in May, but the majority still maintain that interest rates are set to rise sharply over the next 15 months
There is a clear majority among financial services economists taking part in this month’s interest rate survey that rates are set to rise sharply over the next 15 months, with some financial services economists responding to the survey believing that the European Central Bank’s base rate may double to 4 per cent by the end of 2004. But the majority view does not automatically translate into a majority in favour of fixing interest rates at current levels, with only four of the ten economists in the FINANCE survey coming out unequivocally in favour of fixing rates now.
However, there remains a strong minority opinion that says interest rates in Europe will remain static or even fall over the next year and a quarter. Against that background, there is a view among a minority of the survey participants that corporates should not yet hedge their exposure and fix interest rates on their borrowings.

Bank of Ireland chief economist Dan McLaughlin has traditionally been the most bullish on the global economy and his contribution to the survey does not mark a departure from his long-held views that the global economies are on a recovery path and that interest rates are as a result likely to rise sharply.

McLaughlin says that the ECB rate will reach 4 per cent by end-2004, saying ‘In the euro area, the ECB may be disappointed by the trend in inflation in the early months of 2004 in part due to a weaker euro and a pick-up in growth, so the repo rate in the euro area may also rise in the first quarter of next year.’ Colin Hunt of Goodbody Stockbrokers is, however, in the opposite camp and believes that ECB rates will fall to 1.75 per cent by the end of this year and remain at that level for all of next year.

‘A lack of domestic demand momentum through next year will prevent the bank (ECB) from moving policy to a tighter setting despite the improving global outlook. As a result we find ourselves in the variable camp in the fixed v floating debate’, states Hunt. The Goodbody economist, however, anticipates a sharp increase in US interest rates with a fall in unemployment in mid-2004 allowing the Federal Reserve to increase rates quickly and sharply to 3.5 per cent by the end of next year.
Hunt’s preference for floating rate borrowing is supported by Donal O’Mahony of Davy who expects ECB rates to fall to 1.5 per cent by end-2004. O’Mahony has retained his position as the economic arch-bear and states that the Federal Reserve and its chairman Alan Greenspan are now in a ‘credibility vacuum’. The Davy bond economist accuses the Fed of ‘mismanagement of bond market expectations regarding its chosen path of monetary policy’ and believes that far from rising over the next 15 months, the Fed’s funds rate will remain at its current 1 per cent.

This latest FINANCE survey also includes forecasts for the Irish and major international stock markets. Irish Life Investment Managers’ head of asset allocation Eugene Kiernan expects steady growth in all markets and believes that the Irish market will rise almost 13 per cent from its current level with the ISEQ Index reaching 5200 by end-2004. ‘We see no return to ‘irrational exuberance’ in markets in 2004, but see equities as compelling and delivering returns superior to other asset classes,’ states Kiernan.

But Kiernan’s optimism in equity markets pales in comparison to the arch-bull, Dan McLaughlin, who expects that 5200 figure for the ISEQ to be reached by the end of the current year with the Irish market index reaching 6000 by 2004, a 30 per cent increase on the current level for the ISEQ.
This quarter’s survey also features forecasts for currencies and bonds.

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