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Interest rates to hold firm into next year, followed by an easing in the second half Back  
Pressures from rising oil and food prices are dissuading the ECB from cutting interest rates, according to respondents in FINANCE’s Interest Rate & Property Survey.
The panel have disparate predictions for interest rates over the next two years. Power sees the ECB dropping interest rates by 75 basis points to 3.50 per cent a view shared by Dan McLaughlin. Power says rising food & energy costs are likely to push inflation higher over the coming months, making interest rate cuts not possible and this may see the ECB tighten in the near term but he says, ‘this would be a major policy mistake as the 2 key drivers of Euro Zone inflation would not respond to tighter monetary policy. The longer-term prognosis is for some easing based on a slower growth background in the euro zone.’

McLaughlin sees rates go as far down as 3.00 per cent at the end of 2009. He says, the recent surge in oil prices have, ‘pushed headline inflation to new cycle highs in Europe’ as the cause of rate increases on the near term but he says ‘The spike in energy costs will dampen economic activity, however, and the ECB may well be cutting rates aggressively in 2009 given that growth in the euro area is already slowing.’
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Interest Rate Table 2008

Austin Hughes & Dermot O’Leary predict 3.75 per cent by June of next year. McLaughlin and Hughes both see the ECB dropping rates by 50 basis points in June 2009. Hughes says, ‘Rising inflation in coming months is likely to force a further ECB rate rise. Subsequently, an easing in commodity prices on signs of a weaker global economy will bring Euro area inflation substantially lower through 2009. Coupled with a marked weakening of activity this will cause the ECB to reverse earlier rate increases and to reduce rates somewhat further.’

These drops in interest rates are not shared by other members of the panel, Noel Griffin of Bank of Scotland sees a rise of 25 basis points at the end of 2008 to 4.50 per cent and then falling back to 4.25 per cent by June next year. Griffin says, ‘with the ECB focusing on rising inflation they will increase interest rates over the coming months.’ Eoin Fahy of KBC sees rates unchanged at 4.25 per cent till the end of 2009 when the ECB will drop rates to 4.00 per cent this is when Jim Power sees rates start to increase from 3.50 per cent to 4.00 per cent.

Oliver Mangan of AIB sees a smaller decrease of rates from 4.25 to 4.00 per cent by the end of 2009 he says, to ‘expect and easing of inflationary pressures in 2009 and marked weakening of activity will see ECB reduce rates in 2009.’

Alan McQuaid who sees a more gradual decrease from 4.25 per cent to 3.75 to the end of 2009 says, ‘Worrying signs are also emerging of rising wage pressures in Euroland, and the central bank has made it clear that it is determined to prevent a wage-price spiral from taking hold, noting an acceleration in Eurozone wages in the first quarter of 2008. Growth in hourly labour costs in the 15 countries using the euro accelerated to 3.3 per cent year-on-year in the first quarter, up from 2.9 per cent in the fourth quarter of 2007. Negotiated wage growth picked up to 2.7 per cent from 2.2 per cent, and the ECB has reported slackening productivity growth at the end of last year, a factor which it says should be kept in mind when negotiating wage rises.

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