Euro rate rise expected as Germany steams ahead

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The Independent Online

The European Central Bank looked set to order a hike in interest rates tomorrow after the German economy recorded its strongest growth for two years. The euro mounted a strong recovery on the foreign exchange markets yesterday after official figures confirmed that Europe's largest economy grew at an annual rate of 3.1 per cent in the last quarter.

The European Central Bank looked set to order a hike in interest rates tomorrow after the German economy recorded its strongest growth for two years. The euro mounted a strong recovery on the foreign exchange markets yesterday after official figures confirmed that Europe's largest economy grew at an annual rate of 3.1 per cent in the last quarter.

The single currency's most significant gains were against the pound, which tumbled against the dollar, falling below $1.46 for the first time in six years. The German figures, which had been heavily trailed, showed the economy grew 1.1 per cent in the second quarter of the year.

The figure was ahead of forecasts and boosted optimism the economy is set for strong growth. Hans Eichel, Germany's finance minister, said he was considering raising the official forecast for GDP growth for 2000 to 3 per cent from 2.75 per cent.

"If we get additional tax returns from stronger growth, we will raise our forecast to 3 per cent," he said after a meeting with his French counterpart Laurent Fabius.

Economists said the data, comments by politicians, and movement in the money markets had made a half-point hike to 4.25 per cent by the ECB tomorrow more likely.

They highlighted a surge in the marginal rate at which banks were bidding for ECB money - the refi rate - to 4.7 per cent from 4.5 per cent last week, implying the markets expect another 0.5 per cent rise.

Nigel Anderson, European economist at Royal Bank of Scotland, which has raised its forecast for tomorrow to a half-point from a quarter-point, said: "What tipped the balance was the large rise in the refi.

"The ECB has allowed that rate to rise so much that economists and analysts will be confused if they don't follow it with a rise in the official rate."

Mark Cliffe, chief economist at ING Barings, said a half-point rise was "almost a formality". He said the ECB had been "distinctly rattled" by the continued fall in the value of the euro, which threatens to import inflation - particularly in the form of rising oil prices.

The ECB has repeatedly warned of the threat poised to its inflation target of 2 per cent from the rising oil price and weak euro. The latest figures show eurozone inflation at 2.4 per cent.

Yesterday oil surged more than a dollar ahead of the latest US stocks data. Brent one-month oil futures rose as high as $31.49 a barrel, a rise of $1.10 or 4 per cent.

The euro hit a four-week high against the pound of 61.60p, although it lost the gains by the close of trading in London. Meanwhile, sterling sunk as low as $1.4567, its lowest since February 1994 and down nearly 1 per cent on the day.

Stephen Lewis, chief economist at Monument Derivatives, said: "Rates will be kept on hold until UK inflation is back above the target, so there isn't any point in waiting around in sterling waiting for the Bank [of England] to make its move."

The Confederation of British Industry welcomed the fall, but it said it brought only mild relief to manufacturers. "We would like to see further sustained easing in the exchange rate," said Ranjiv Mann, senior economist at the CBI.

ING's Mark Cliffe added: "Euro-baiting is still the most popular sport in the City."

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