Inflation to hit 7pc as Euro bank raises rates

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Inflation to hit 7pc as Euro bank raises rates

By BRENDAN KEENAN, Group Business Editor

INFLATION is likely to hit 7pc next month, as a surprise hike in interest rates yesterday gave another twist to headline inflation.

The European Central Bank hopes the rise - the eighth since last November - will help squeeze underlying inflation in the 11-nation eurozone by curbing spending and borrowing.

Prices have been hit by dearer oil and a falling euro. Inflation in the zone is averaging around 2.5pc - above the ECB's demanding target of 2pc.

Irish banks and mortgage lenders are expected to pass on the increase, bringing a typical variable mortgage rate to 5.75pc. That will add about #11 per month to the cost of a #75,000 mortgage.

There have been signs the housing market is finally slowing down, and the rate hike may curb further price rises.

However, most analysts think rates are now near their peak and see little danger of a property price collapse.

``Our studies show that people could start getting into trouble if mortgages went much above 6pc,'' said Dan McLaughlin, chief economist at Riada Stockbrokers. ``If rates went higher through 2001, it could have an impact, but all the signs are that the eurozone economy is slowing and mortgage will not go much higher.''

``The market is convinced that today's hike is it for this year, but ECB President Wim Duisenberg certainly delivered the impression that there is maybe some room for one more move this year,'' said economist Eckhard Schulte in Frankfurt.

Mr Duisenberg warned of continuing inflation risks from high levels of credit, oil prices and the weak euro. But he denied the hike had been mainly intended to bolster the flagging currency.

The euro rallied in late New York trading, gaining two-and-a-half cents to reach 89.7 US cents. Earlier, it had fallen in value as dealers were surprised by this latest move.

``Some people think by raising rates they won't really help growth in Europe,'' said Jeffrey Yu, a currency trader at Sanwa Bank in New York.

``I think the ECB is sending out a strong anti-inflationary signal, particularly against people trying to compensate themselves for the rise in oil prices.'' Dan McLaughlin said.

``But the market may say it is growth that matters, and that is a risk for the euro,'' he added.

http://www.independent.ie/2000/279/d01a.shtml

-- Carl Jenkins (Somewherepress@aol.com), October 06, 2000


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