Economics - The Week in View: Europe will ignore Federal Reserve interest rate rises

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Opinion is divided over whether the Federal Reserve will rise interest rates when its policy-making committee meets on Tuesday. Virtually everyone agrees on what European central banks will do if the Fed chooses to raise them: nothing.

With inflation slowing and unemployment lines lengthening, European central banks see no need to raise rates. And with just seven months for nations to make their budgets presentable for the European Union's single currency, they need to keep rates low to promote what little economic growth the region is experiencing.

The Fed hasn't got that problem. In stark contrast to the Continent, the US economy is surging. Gross domestic product soared to 5.6 per cent in the first quarter. Unemployment sank below 5 per cent last month. A rate increase seems just a matter of time.

The only European country that might be influenced by a Fed move is the UK Its economy is the only one with comparable growth and a comparable threat of inflation.

Moreover, the Bank of England - now free to set interest rates on its own - said in its quarterly inflation report last Tuesday that it foresaw interest rates rising "moderately" this year to make sure inflation stays within the government's annual target of 2.5 percent.

Even so, the Fed's action, or lack of it, probably won't be the most important factor in the Bank of England's decision.

"The bank made is clear that it is more preoccupied with domestic leading indicators such as house prices, money supply and earnings growth," said Andrew Milligan, the economic advisor at General Accident.

France and Germany both reported this week on consumer price moves in April. And both report they fell for the month. For the year, inflation slowed to a 40-year low of 1.0 per cent in France and to 1.4 per cent in Germany.

The German Economics Ministry said on Friday that the price climate remains "exceptionally stable". Even the ever-wary Bundesbank admitted in its annual report that inflation remains "undisturbed" by higher import prices.

And in France, the elections that start 25 May will have far more effect than a US rate increase. The final round of France's general election takes place on 1 June, days after the Fed's meeting. Barring a massive speculative selling attack on the franc, the Bank of France won't touch official interest rates until the election is over, a new government is in place and its commitment to European economic and monetary union is clear.

Elsewhere, even countries with such poor inflation records as Italy, Spain and Portugal are reporting inflation rates lower than they've been in 20 or 30 years. The Bank of Spain took advantage of country's low inflation climate and slashed its benchmark lending rate to an all-time low of 5.25 per cent.

ECONOMIC STATISTICS - THE WEEK AHEAD

MONDAY

France, Switzerland, Belgium, Holland, Denmark, Germany closed

UK: PSBR (April)

Spain: unemployment (Feb)

Japan:trade surplus (April)

TUESDAY

Germany: manufacturing orders (March) (20-23 May); M3 money supply (April) (20-23 May); producer prices (April)

US: FOMC Meeting

Spain: industrial output (March)

Japan: industrial output (March)

WEDNESDAY

UK: M4 money supply( April); minutes of 10 April monetary policy meeting

US: monthly budget statement (April); trade deficit (March)

Italy: consumer price index (May)

Sweden: retail sales (March); industrial orders (March)

THURSDAY

UK: retail sales (April); first-quarter GDP; CBI Industrial Trends Survey (May)

France: industrial production (March); manufacturing production (March)

Sweden: current account, industrial production (March)

FRIDAY

Nothing scheduled Copyright: IOS & Bloomberg

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