Europe likely to hold rates again

The Bank of England has kept interest rates the same since November

LONDON, England -- The debate over European interest rates has become one of when, not if, borrowing costs will start rising again.

For months, economists and market analysts have been predicting a hike in rates.

By most indications, consumer and business confidence is returning. Economic data is pointing to renewed growth after a weak first quarter which followed a stuttering end to 2001.

The economy has picked up speed in the second quarter of this year with exports, which fuel most European economies, on the rise again.

Inflation -- a critical component of monetary policy -- is showing signs of easing, despite strong consumer spending.

The euro, which has been the weak sister to the dollar since its inception three-and-a-half years ago, reached a 15-month high against the U.S. currency this week as investors poured cash in to European investments amid concerns over the slowing pace of the recovery in the world's biggest economy.

The European Central Bank cut rates four times last year

But just when it seems European economies are springing back to life, small cracks appear on the surface.

Unemployment is still running high in many countries, and hefty wage settlements -- particularly in Germany where the strong IG Metall union has won a 4 percent pay increase for its members -- could provide renewed upward pressure on prices and squeeze corporate earnings, resulting in cutbacks and more layoffs.

And the UK, which had the best performing economy of the Group of Seven nations in 2001, has stumbled out of the gates this year.

Instead of moving quickly and raising rates to contain an economy recovering -- as many had anticipated -- the Bank of England and the European Central Bank have held off tightening monetary policies for fear of derailing a rebound.

And while many central bank watchers had been calling for rate hikes at next week's BoE and ECB monetary policy meetings, that now seems unlikely.

"We probably won't need a rate rise now until September," Michael Lewis, an analyst at Deutsche Bank, told CNN.

The ECB, which cut its key lending rate four times in 2001, has held its benchmark rate at 3.25 percent so far this year as it monitored the economic recovery and its impact on inflation.

Germany, the eurozone's largest economy, saw its gross domestic product grow 0.2 percent in the first quarter, after shrinking 0.3 percent at the end of 2001.

France, the eurozone's second largest economy, registered GDP growth of 0.4 percent in the first three months on the year, after a decline of 0.4 percent in the fourth quarter of 2001. No.3 Italy advanced 0.2 percent in the first quarter of this year.

Despite this growth, eurozone inflation still fell below the ECB's target of 2 percent in May, for the first time this year.

In the UK, the BoE is expected to leave its key interest rate at 4 percent, the lowest level in 37 years, after cutting it seven times last year.

The economy barely grew in the first quarter of this year, edging up by only 0.1 percent between January to March from a year earlier -- the slowest annual growth since the end of 1992. The manufacturing sector continues to be the hardest hit sector.