Strong data on the German economy, together with hawkish comments from top European Central Bank (ECB) officials yesterday, gave rise to predictions that euro-zone interest rates will increase by a further three-quarters of a percentage point before the end of the year, starting as early as May.
In a sign of growing inflationary pressures in the German economy, producer price inflation in February reached 5.9 per cent year-on-year, Germany's Federal Office of Statistics confirmed yesterday.
The rate has strengthened from 4.6 per cent in October to its highest reading since 1982, a development blamed on energy price pressures.
Leaving out energy prices, producer prices grew by just 1.1 per cent annually, according to the statistical office.
Meanwhile Germany's chamber of industry and commerce, or DIHK, yesterday produced a survey showing business optimism soaring to five-year highs.
"The signs for the economy this year are better than any time in five years. Real economic growth of 2 per cent is consistent with our findings. This means that Germany's economic development is at last benefiting from an improvement in the global business cycle," said DIHK chief executive Martin Wansleben yesterday.
The business group has raised its forecast for economic growth in Germany from 1.5 per cent to 2 per cent.
ECB president Jean-Claude Trichet yesterday reinforced last week's warnings from ECB chief economist Otmar Issing about the amount of cash circulating in the euro-zone economy and that inflation remained above the ECB's reference rate.
"We have inflation that is above 2 per cent. We must do everything we can do to counter the risks of inflation," Mr Trichet told French television station LCI.
Alan McQuaid of Bloxham Stockbrokers predicted a further three-quarters of a percentage point rise in ECB rates by the end of the year.
"We think the risks to the euro-zone interest rate cycle are to the upside this year, with the odds clearly pointing to the ECB's key lending rate being no lower than 3.25 per cent come year-end, from 3 per cent previously," he said.
The ECB's key lending rate - the so-called main refinancing rate - now stands at 2.5 per cent.
A three-quarter point rise in the refinancing rate before end year would imply an equal increase in the ECB's marginal lending rate, as well as the deposit rate, the ECB's two other key policy rates.
l Mr Trichet last night said euro-zone countries must free up their labour markets to cope with globalisation.
His comments followed French protests against relaxed job protections.
