Pressure mounts for a Euroland rate hike

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The Independent Online

Europe's central bank looks poised to hike interest rates for the first time in more than two years after figures yesterday pointed to an accelerating economic recovery.

Europe's central bank looks poised to hike interest rates for the first time in more than two years after figures yesterday pointed to an accelerating economic recovery.

The single currency surged against the dollar as the debate shifted from whether the ECB would tighten policy to how large the hike would be.

The ECB meets next week and any hike could be the first of a triple whammy for interest rates with the Bank of England meeting next Thursday and the US Federal Reserve due to meet on 16 November.

Speculation of a eurozone rate hike grew feverish after figures showed money supply rose dramatically to 6.1 per cent in September from 5.7 per cent. The preferred three-monthly average rose to 5.9 per cent from 5.6 per cent - still further from the ECB's 4.5 per cent target.

Analysts said the strength of the data should resolve the division within the ECB's governing council that emerged on Tuesday when Bundesbank president Ernst Welteke revealed the Bank was split over the implications of recent figures. "It now appears the argument is not whether the ECB will raise rates, but rather by how much," said Audrey Childe-Freeman, of CIBC World Markets. "A 50 basis points rise seems the most likely outcome."

Stephen Lewis, of Monument Derivatives, said a 0.5 per cent hike would also be good for the euro, which yesterday rose half a cent to $1.0629. "The euro has been wilting ... A rate rise should arrest the slide," he said.

A poll of 49 European economists found the vast majority, 44, expected a rate rise, with 28 forecasting a 50 basis point hike. This would take the cost of borrowing back to 3 per cent, its level before the ECB cut it to 2.5 per cent in April to rejuvenate the economy. The ECB has not raised rates since it came into being on 1 January. A rise next week would be the first since the Bundesbank lifted rates by 0.3 per cent to 3.3 per cent in October 1997, prompting other European central banks to follow suit.

Meanwhile, the Bank of England's Monetary Policy Committee is expected to raise rates to 5.5 per cent on Thursday after recent figures pointing to a booming housing market and a recovery in manufacturing.

Yesterday the UK's major banks said net mortgage lending rose to a record of £1.7bn in September with an increase in loans going on home purchases rather than homeowners remortgaging to get a better deal.

However, the data contrasts with a fall in building society lending and a survey from chartered surveyors indicating the pace of growth in house prices has eased.

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