B of I predicts interest rates to rise in March

Interest rates are likely to rise again in March as a result of stronger-than-expected growth in the global economy, Bank of Ireland has predicted.

In its monthly bulletin, the bank's chief economist, Dan McLaughlin, says the pace of global economic activity looks set to accelerate placing further upward pressure on capacity and commodity prices.

As a result of this positive global economic backdrop, Dr McLaughlin said March may well prove a bad month for borrowers with the ECB moving its benchmark rate to 2.5 per cent early in the month.

He also predicted the US Federal Reserve would push up rates to 4.75 per cent by the end of the month.

"Unless the global economy starts to slow down the rate risks are all to the upside," he added.

Dr McLaughlin said growth in the US economy slowed in the final quarter of 2005 but has rebounded strongly in 2006.

"The consequence of this is that the Federal Reserve is concerned that the pace of growth will push inflation higher, and has warned the market that rates may need to rise further."

He said: "Rates in the US are now expected by the market to peak at 5 per cent, from the current 4.5 per cent".

In Asia growth has remained extremely strong, notably in China and in Japan, with the latter recording annual growth of 4.2 per cent, he said.

Dr McLaughlin said the euro area had proved an exception to the buoyant global growth story, but positive signals are very apparent in Germany, where one of the most closely watched business climate indicators, the IFO survey, reached a five-year high in January.

"This new-found optimism on euro zone growth prospects has influenced the ECB, which appears less concerned about the downside risks to growth and more concerned about the risks to inflation," he said.