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ECB raises interest rates; says has 'no bias' regarding future moves

    - Interest rates on hold for remainder of 2008; likely to be lower in 2009

    "Having warned in June that an increase in interest rates in July was possible, the ECB duly delivered a 0.25% hike to 4.25% at this month's meeting, the first change in rates in a year. The ECB said it took the action to prevent the emergence of 'second-round effects' from the recent rise in inflation and to ensure price stability over the medium-term. It also said it had 'no bias' regarding future interest rate moves but would do whatever is necessary to deliver low inflation", according to Bank of Ireland's July Bulletin which was published today, 31 July 2008.

    Author of the Bulletin, Michael Crowley, Senior Economist, Bank of Ireland said:"Inflation rose again in June, to 4%, and is likely to move even higher in the near-term. Core inflation remains below 2% however, underlining the extent to which rising energy and food prices have boosted overall inflation during the past year. The recent fall in the oil price - of around $20 per barrel in the past month - is clearly good news therefore, and if sustained should result in inflation falling back again towards the end of this year and, particularly, in early 2009.

    "At the same time, the outlook for the euro zone economy has deteriorated. The available indicator data, notably the Purchasing Managers measures (PMIs) of activity in manufacturing and services, point to little or no growth in real GDP at present, following an increase of 0.7% in the first quarter. The latest money and credit data published by the ECB are consistent with this picture of slowing activity. Growth in lending to the private sector moderated further in June, amid a continuing slowdown in mortgage lending and a notable easing in lending to the corporate sector, the latter albeit from a relatively high rate of growth.

    "In its June macroeconomic projections the ECB envisaged economic growth slowing to an average of 1.8% this year, from 2.7% in 2007. It will almost certainly have to revise this down, to well under 1.5%, and may have to trim its 2009 forecast (currently 1.5%) as well. Of course, inflation this year will be higher than forecast and is likely to be close to 4% rather than the 3.4% projected in June, though presumably this partly informed the decision to raise interest rates this month. Nevertheless, the deterioration in the growth outlook, coupled with recent developments in the oil price, should be enough to stave off any further increase in interest rates in 2008. Moreover, lower rates in 2009 look increasingly likely, as inflation pressures begin to ease later this year and the economy remains weak", concluded Michael Crowley.

    Ends

    31 July 2008

    For reference:

    Michael Crowley
    Senior Economist
    Bank of Ireland Global Markets
    Tel: 01 6093341

    Anne Mathews
    Media Relations Manager
    Group Corporate Communications - Bank of Ireland
    Tel: (01) 604 3836