European Central Bank (ECB) rates should increase to 3.5% by the end of this year, but are expected ...
European Central Bank (ECB) rates should increase to 3.5% by the end of this year, but are expected to start decreasing again in 2007, according to HSBC Global Research.
HSBC said the rises should reduce some of the positive effects of low interest rates and could hit economies such as Spain and Ireland.
The group said these countries had high debt levels and negative real wage growth. For example, figures from the bank showed Spain's household borrowing had increased 28% for the year, while in Ireland this was 25%.
Furthermore, the statistics showed consumer spending in Spain, which represents 12% of the eurozone, accounted for 30% of consumer spending growth across the region.
As a result of the reduced spending power, HSBC predicted the eurozone economy to slow from 2.5% in 2006 to just 1.5% in 2007. The group said this would lead to the ECB reducing rates.
However, the bank believed German consumers would be the least likely to be impacted by rate rises because they were not as overstretched. Figures from HSBC showed German household borrowing was only 0.8% for the year.
Moreover, HSBC explained Germans were unable to spend and borrow as much because real wage growth was in negative territory at -0.9% for the year, with household disposable income averaging just 0.2% since 2002. key points
ECB rate rises to continue
Spain and Ireland could be hard hit
ECB may reduce rates in 2007 as growth slows strategy
Fidelity Multi Asset CIO's outlook
Willis Owen report
From 1 March
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