Optimism in Europe about growth is running high, with German consumers the most upbeat in five years, Italian executives positively giddy and even business confidence in France up for the first time in four months. That is part of why the European Central Bank, which meets Thursday to discuss interest rates, will soon raise its 2.25 percent refinancing rate -- just not this Thursday, analysts and economists say.
The bank predicts that inflation -- its chief concern -- will remain above 2 percent this year because of stronger economic growth, high oil prices and worker demands for increased wages. With growth now strong enough to take the sour anti-inflation medicine of a rate increase, most observers feel the bank will act soon. The 12-nation euro zone's economy is forecast to grow 1.9 percent this year, up from 1.4 percent in 2005, the ECB has said. That rising growth, and wage demands -- Germany's IG Metall is seeking a 5 percent increase for its 3.4 million members -- means the bank is waiting for the right moment to carry out a rate increase, said Joerg Kraemer, chief economist for the HVB Group in Munich, Germany.
Otmar Issing, the ECB's chief economist, said Jan. 19 that risks to the euro-zone economy had "clearly diminished. Almost all data show that the upswing is continuing and strengthening."
With economic indicators such as productivity and consumer confidence rising, the bank is free to act. "As long as they are rising, the ECB tends to raise interest rates," Kraemer said. There have been calls in Europe for the ECB to mirror the U.S. Federal Reserve Bank, which meets again Tuesday and is expected not only raise its own rate but leave the door open for another increase as incoming Fed Chairman Ben Bernanke takes the helm from Alan Greenspan.
Current U.S. rates are at 4.5 percent after a series of measured increases, while the ECB had not raised rates for five years before bumping them up a quarter point to 2.25 percent in December. The widening interest rate gap helped the dollar gain back lost ground last year against the euro, which had reached an all-time high of US$1.3667 at the end of 2004 -- largely on concerns about the huge U.S. trade and budget deficits.
ECB President Jean-Claude Trichet warned at the World Economic Forum in Davos, Switzerland, last week that if growth in Europe is to continue, governments must cut their spending and reform their labor markets. "The level of government spending is too high," he said. Standard & Poor's said Monday that the economic recovery in Europe should remain on track, given efforts by Germany, France, Italy and Spain to cut unemployment.
"In the euro zone as a whole, one of the most encouraging developments in the past few months has been the stabilization, or in certain cases the beginning of a decline, in unemployment rates," said Jean-Michel Six, S&P's chief economist for Europe. "Although the overall improvement in the single currency zone still appears modest, we expect unemployment rates to decline somewhat in 2006, for the first time in several years."