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Economists predict rates to rise further by 75 bp over coming year Back  
Ireland’s leading financial services economists, responding to a survey in this issue, have predicted that interest rates will continue to rise in the Eurozone, and that the time for fixing borrowings has passed, with interest rates in the Euro zone set to ‘normalise’ after years of record lows.
Following the European Central Bank’s recent rate hike of 25 basis points, Ireland’s leading financial services economists are predicting sustained rate rises over the coming year in the euro zone. Moreover, they predict that rates in the US will rise by a similar amount, but that the UK will remain at its present level.
Most of the economists responding to the survey say that rates in the Euro zone will be at a level of 3.00 by the end of the first quarter of 2007.
However, two economists, Noel O’Halloran, chief investment officer with KBC Asset Management, and Jim Power, chief economist of Friends First, are more pessimistic on rates, predicting that they will be at 3.25 by 2007. ‘Evidence of strong liquidity growth, very strong property markets emerging around the continent and continuing in economies like Ireland and Spain, and evidence of loan growth picking up strongly’ is sufficient for the ECB to justify their continued gradual raising of rates towards 3.5 per cent sometime in 2007,’ writes O’Halloran.
The consensus amongst the economists is that rates in the US will rise by 75 basis points between now and Q1 2007, up to 4.75. However, one economist, Austin Hughes, chief economist of IIB Bank, predicts that although US rates will rise, they will fall back to 4.00 by Q1 2007. He says that two factors will cause this, ‘the prospect that after several scares in recent years, the US consumer will finally begin to scale back spending,’ and Alan Greenspan’s replacement by Ben Bernanke at the helm of the Fed. This will be important says Hughes, ‘because Bernanke appears much more confident that the battle against runaway inflation has long been won’.

Overall, the economists are predicting no rate change in the UK, with the current rate of 4.25 expected to stand until the end of the first quarter of 2007. When looked at on an individual basis however, the opinions differ from economist to economist. Power is the most bullish on UK interest rates, and he predicts the rate will fall to 3.75 by the end of Q4 2006. He says, ‘In the UK, the Bank of England is likely to respond to the significant easing of house prices and general economic activity in recent months, and the probability of fiscal tightening over the coming year, by cutting rates further during 2006.’ NCB’s chief economist Dermot O’Brien on the other hand is predicting continued rate rises, and expects it to rise another 50 basis points by 2007.
With regards to whether or not you should fix your mortgage, Alan McQuaid, chief economist with Bloxham Stockbrokers says that the best deals have probably been missed at this stage, but adds, ‘That said there appears to be still some good value out there in 1-3 year fixed rates. I would be reluctant to fix any longer than that.’ McQuaid would be inclined to wait for about six months before deciding whether to fix or not. ‘By that stage we should have a better idea as to how the Eurozone economy is performing and the extent of underlying inflationary pressures,’ he says.

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