Low Bounce in Euro Economic Recovery Facing Risk of Interest Rate Hike, E&Y Warns

Lucas Gilmore, “Big 4″ observer
April 04, 2011 /

As the European Central Bank mulls raising interest rate later this week to ward off inflation, economists from Ernst & Young warns of the grim prospect of its unwanted effect on the euro zone economic recovery that still struggles its way up.

The bank plans to raise its interest rate from 1 percent to 1.25 percent before this week ends to fight inflation, amid a slow recovery of the euro zone economy.

The move comes more than two months after Bank of England uncovered the same plan, to which economists from Ernst & Young directed a call urging the bank to “hold its nerves” from raising interest rate despite reports of inflation expected over the early part of 2011.

Ernst & Young ITEM Club on January projected the inflation rate to climb to 4 percent one month after due to widespread spending cuts in government, VAT and commodity price increases.

However, it warned that raising interest rate would seriously endanger the recovering economy if Bank of England failed to hold back its strategy of fighting inflation.

If pushed through by the European Central Bank later this week, the rise in interest rate is likely to go on later this year, thereby harming the “fragile economic recovery” in the euro zone, according to Marie Diron and Mark Otty from Ernst & Young.

The consulting firm projected a 1.5 percent increase in the GDP of euro zone this year and 1.7 percent in 2012. It urged UK investors to capitalize on emerging markets like Brazil, India and China, as has been the trend following the global recession.

Last month, inflation in Europe gained speed overnight, the fastest in over two years. Subsequently, policy makers from the European Central Bank decided to raise interest rate, which will be tackled on April 7 at its meeting in Frankfurt.

Diron described the move to raise the interest rate a “policy mistake” as quoted by Bloomberg.

Diron revealed a forecast in Ernst & Young’s report predicting the inflation to fall again next year below 2 percent as oil prices are expected to return to ”fundamental levels” and the impact of VAT is said to wane down.

 

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