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Morgan Stanley raises end-2007 rate forecast to 4% on growth

Morgan Stanley said it expects the European Central Bank to raise its key interest rate to 4% by the end of 2007, a percentage point higher than its previous projection as economic growth beats forecasts.

„As the domestic economy continues to expand at a pace close to trend in 2007, the ECB is likely to normalize monetary conditions further,” said Eric Chaney, chief European economist at Morgan Stanley in London, in an e-mailed report. The investment bank no longer expects the ECB to cut rates in the H2 of the year, according to Chaney. ECB President Jean-Claude Trichet has already signaled the central bank will take its key rate to 3.5% next month, saying as recently as November 20 that policy makers will show „strong vigilance” to prevent growth fueling inflation. Morgan Stanley said it now expects the economy of the dozen euro nations to expand 2.6% this year and 1.9% next, compared with September forecasts of 2.1% and 1.4% respectively. Inflation will probably slow to 2% in 2007, Morgan Stanley said, at the top end of the ECB's ceiling. (Bloomberg)