Bank of Ireland's Dan McLaughlin turns bearish on interest rates; ECB rate to rise to 4% in June

Irish
Bank of Ireland's Dan McLaughlin turns bearish on interest rates; ECB rate to rise to 4% in June - UK rate to 5.5%
By Finfacts Team
Feb 26, 2007, 09:32

ECB rates to rise to 4%
UK rates to rise to 5.5%

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Commenting on the publication of the February Bank of Ireland Global Markets’ Research Bulletin,* Chief Economist, today Dr. Dan McLaughlin, said that the Bank is changing its interest rate forecasts as monetary policy is tightened by more than previously expected on the back of the unprecedented global boom. Euro rates are now seen rising to 4% in 2007, with Sterling rates likely to rise to 5.5%.

In late 2006, McLaughlin had forecast that the ECB rate would peak at 3.5% and on Jan 30, 2007, he said that he expected the rate to peak at 3.75%.

Finfacts had written on Jan 01, 2007 that the ECB rate may rise to 4% in 2007 as a sustained period of global economic growth was forecast to beat a 40-year record. Last week, Junior Minister Michael Ahern referred to a continuing global economic slowdown.

IMF Managing Director Rodrigo de Rato who is in a position to know more about the global economy than Minister Ahern, said last month: After four consecutive years of strong growth, what we expect is that global growth will remain solid in 2007, approaching 5 percent. This represents certainly a very significant expansion of the global economy and probably the longest — if not the longest, one of the longest — sustained periods of growth in the post-Bretton Woods era, that is, after the Second World War.

Dr. McLaughlin commented today: “The last few weeks have seen surprising fourth quarter growth figures from a range of economies. In Germany, for example, fourth quarter growth was 0.9%, taking the annual increase to 3.7% and the average growth rate for the year as a whole to 2.7%, the best performance in six years. Italian growth in Q4 was also substantially stronger than expected, with France too exceeding expectations.

As a result, growth in the eurozone was also more buoyant than generally forecast, at 2.7% for 2006 as a whole, again the fastest pace since 2000. This growth surge in the final months of 2006 means a strong start to the New Year and forecasters are now scrambling to revise up their 2007 projections; the euro area is now likely to see growth of 2.7% against an expectation of 2.2% just a few months ago. Consequently, Bank of Ireland believes that the ECB will not be content to just move rates up one more time, to 3.75% in March, and now forecasts an additional quarter point more, to 4%, most likely in June.”

Commenting on sterling, McLaughlin said that growth in the UK also accelerated in the fourth quarter, and that the Bank of England expects the economy to continue to grow at its potential rate over the next few years. “Consequently, we are revising our UK forecast, too, with 5.5% rates forecast over the next few months. Our view that 5.75% will not be reached is unchanged. Although the market is now no longer expecting this either, this explains why the euro is once again back above 67 pence sterling.”

*the February issue of the Bulletin had not been uploaded by BoI at the time of posting this report.