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European inflation accelerates for first time in seven months

Inflation in Europe accelerated in November for the first month in seven and confidence stayed close to a six-year high, strengthening the case for higher interest rates.

Consumer prices in the dozen nations sharing the euro rose 1.8% from a year earlier, above the 1.6% gain in October, Eurostat, the European Union's statistics office in Luxembourg, said today. An index of executive and consumer sentiment eased to 110.3 this month from a revised 110.4 in October, according to a separate report from the European Commission. Economists have revised up their predictions for European Central Bank interest rates on the view the economy of the dozen euro nations will gather momentum next year after a slowdown in the 1Q. Still, the euro's appreciation this week to a 20-month high against the dollar may damp overseas sales of European goods just as global growth cools. “Given the momentum in the economy, given the strength of business confidence, monetary growth and bank lending, we are likely to see further rises after December,” said Dan McLaughlin, chief economist at Bank of Ireland Plc in Dublin. “The euro is the wild card in all of this.” The inflation measure, which is a preliminary estimate, matched the median forecast of 26 economists in a Bloomberg News survey. Economists had expected an increase in the confidence gauge to 110.4 from an initial October reading of 110.3, according to another survey. The pace of economic growth in the euro-area eased in the 3Q, the commission said, confirming a November 14 first estimate. The economy expanded 0.5% in the 3Q from the previous three months, when it grew 0.9%. The 2Q growth was the fastest in six years. Business spending rose 0.8% in the 3Q, compared with 2.3% in the second, the commission said. Consumer spending growth accelerated to 0.6% from 0.3%.  Unemployment in Germany, Europe's largest economy, fell more than expected in November to 10.2%, the lowest in four year, the country's Federal Labor Agency said today. Business confidence in Germany, Europe's largest economy, unexpectedly rose in November to match a 15-year high, figures published November 28 showed.

In France, optimism held near the highest since 2001. ECB President Jean-Claude Trichet has indicated the bank will take its key rate to 3.5% next month, the sixth increase in a year. The ECB's governing council next decides on rates on December 7, when it will have new forecasts for growth and inflation. The ECB has scope to further raise borrowing costs as the fastest expansion since 2000 looks set to help the euro-area economy cope with a planned increase in Germany's value-added tax, a sales levy, in January. Morgan Stanley last week abandoned a forecast for lower borrowing costs in 2007 and now expects the bank to lift its benchmark rate to 4% from 3.25%. McLaughlin of Bank of Ireland expects the ECB to raise interest rates to 3.75% in the 1Q 2007. Expectations of further rate increases pushed the euro this week to the highest since March 2005, prompting some economists and executives to say the ECB should call a halt to its cycle of interest-rate increases next year. The currency's gain, which makes euro-area exports more expensive overseas, may damp demand for European goods in the US, where economic growth is already easing. The US is the destination of about one-fifth of Europe's exports.

The euro was at $1.3193 and 153.30 yen today. Barclays Capital calculates the recent move in the euro is the equivalent of a 17-basis-point increase in the ECB's key rate in terms of its impact on the economy. “I hope there is no pre-programmed and foreseeable rate increase month after month or quarter after quarter if the economy were to slow,” Belgian Finance Minister Didier Reynders said on November 28. While inflation remains under the ECB's 2% target, the central bank is concerned liquidity growth will fan spending on everything from metals to houses and stoke inflation. The bank's key money-supply indicator rose 8.5% in October from a year earlier. It has exceeded 4.5%, the level the ECB says is non-inflationary, every month since June 2003. ECB council member Juergen Stark said yesterday, the recent growth in money supply must be taken “very seriously.” His colleagues Axel Weber and Klaus Liebscher have said money and credit growth call for “vigilance.” While oil prices in New York have declined from a record $78.40 a barrel in July, they are still up 8.7% in the last 12 months. Crude oil was at $62.33 a barrel today. The ECB may also be concerned that a German government plan to raise the value-added tax to 19% from 16% in January will lift the inflation rate. “The ECB is right to be concerned,” said Giada Giani, an economist at Lehman Brothers in London. “Over the next six months, it's fairly likely that inflation will rebound above the 2% mark.” (Bloomberg)