ECB chiefs to fix interest rate at 4pc for 'long period'
Thursday January 10 2008
Today's first policy meeting of the year for the European Central Bank is likely to be the start of a long period of unchanged interest rates, analysts and financial market prices say.
Figures yesterday showed that the eurozone economy grew faster than expected in the third quarter of last year, justifying the ECB's hikes in interest rates to 4pc and its plans to raise them further.
Those plans were shelved when the credit crunch struck in August, but inflationary pressures from last year's strong growth make it unlikely the ECB will follow the US Federal Reserve and the Bank of England with early cuts in rates.
Latest estimates put inflation in the eurozone at more than 3pc.
The EU statistics office Eurostat said yesterday that gross domestic product (GDP) in the eurozone rose 0.8pc in the July-September period, higher than the previously estimated rate of 0.7pc.
That left GDP 2.7pc higher than the same period of 2006. That is well above the eurozone's potential non-inflationary growth rate, which the Commission and the ECB estimate at around 2.2pc.
Growth is expected to fall below potential this year as the economy slows. Other data yesterday showed German industrial output, exports and retail sales all fell in November.
Against this background, markets are pricing in a one-in-three possibility of just one ECB cut this year.
"They'll be on hold for the first few months of the year, maybe as long as to June, then we look for them to cut rates in the back half of the year," said Fred Goodwin of Lehman Brothers. However, the Danske/National Irish Bank ECB 'barometer' this week still saw a slightly higher chance of a rate rise later in the year.
- Brendan Keenan Group Business Editor
