Confidence in the European economy probably rose to the highest in almost six years in November and inflation may have accelerated, strengthening the case for higher interest rates, surveys of economists show.
An index of executive and consumer sentiment in the dozen nations sharing the euro may have increased to 110.4 from 110.3 last month, which was the highest since February 2001, according to the median of 24 forecasts in a Bloomberg News survey. The European Commission will release the report November 30. 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 Q1.
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%. „Confidence will probably remain good next year, but perhaps slightly less euphoric,” said Martin van Vliet, an economist at ING Wholesale Banking in Amsterdam. The ECB will raise its rate in December and „probably” again in the Q1, he said. Inflation may have accelerated to 1.8% in November from 1.6% the month before, another survey shows. The European Union statistics office will release that report November 30.
Expectations of further rate increases pushed the euro above $1.30 on November 24 for the first time since April 2005, clouding the outlook for exports at a time when the US economy is already slowing. DaimlerChrysler AG, the world's largest truckmaker, said November 17 it expects a „profound downturn” in US demand. „At these levels, it's not dramatic, but it will have a small effect,” said Jose Luis Alzola, an economist at Citigroup Inc. in London.
Should the euro reach $1.35 „in the next few days or weeks, that will change things.” 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 has scope to further raise borrowing costs as the fastest expansion since 2000 looks set to help the economy cope with a planned increase in Germany's value-added tax, a sales levy, next year. „Market sentiment seems to be changing very rapidly, with an increasing number of investors adhering to our view that the VAT hike may not be that damaging to growth,” said Stephane Deo, an economist at UBS AG in London.
Business confidence in Germany, Europe's largest economy, unexpectedly rose in November to match a 15-year high and in France, optimism held near the highest since 2001. An industry survey will probably show on December 1 that manufacturing in the euro region expanded for the 17th consecutive month in November, economists said. The ECB's governing council next decides on rates on December 7, when it will have new forecasts for growth and inflation. (Bloomberg)