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Euro rates forecast to hold steady for 2004 Back  
No rise predicted for the Eurozone, but the cycle is set to turn in UK and US, a panel of leading economists predict.
There will be no interest rate rise in the Eurozone this year, the majority of financial services economist responding to FINANCE’s regular forecasting survey predict, but rates will rise by 0.28 per cent compared with now, in the first half of 2005. In the US and UK, the majority predict rate increases by year-end.

The respondent with the largest forecast increase is Noel GGriffin, head of treasury and investments with Bank of Scotland (Ireland), who predicts that by the end of Q2, 2005, the ECB’s refinancing rate will rise to 3 per cent, up 1 per cent on the current level of 2 per cent, the US rate will rise to 3 per cent, up 2 per cent, and the Bank of England’s rate will increase to 5 per cent, up 1 per cent on the current level.

However, there is a strong minority opinion that there will be a further cut in rates, led by Donal O’Mahony, global bond strategist with Davy Stockbrokers, who maintains the contrarian position he has held in previous surveys. He predicts that rates in the Eurozone will fall to 1.75 per cent by the end of Q2 of this year, down by .25 per cent on the current level, decreasing to 1.50 per cent by Q2 of next year. Alan McQuaid, chief economist, Bloxham Stockbrokers, and Brendan Seaver, country treasurer for Bank of America, also predict rate decreases by year-end.

In the US, O’Mahony expects that there will be no rate increase until 2005, saying that, ‘the 1 per cent funds rate of the US Federal Reserve stands as one of the great anachronisms of our age, this 45-year low borrowing cost almost mocking in its unflinching response to the recent growth spurt of the US economy’. Dan McLaughlin, chief economist with Bank of Ireland, says that the case for fixing rates in the Eurozone is now compelling, and says that 3-year swap rates of 2.80 per cent represent good value, as business spending in the euro area is gaining momentum.

Against fixing is Oliver Mangan, chief bond economist with AIB Global Treasury. ‘With an increase in ECB rates a long way off, borrowers in euros should not pay a significant premium for fixed rate loans,’ he says. McQuaid is also of this opinion, saying that, ‘even on the assumption of an economic recovery in the region, it is hard to see the ECB aggressively raising official rates over the next 12-18 months’. On the fence is Griffin who recommends a blend of variable and fixed rates to be part of any borrowing strategy.
For full survey and predictions on bonds, equities and currencies see page 4.

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