The European Commission has raised its prediction for economic growth in euro region for the current year and cut its prediction for inflation. Following a strong economic growth of 2.7 percent last year, EU has revised its earlier prediction for 2007 to 2.4 percent from 2.1 percent predicted earlier. Though, the growth figure predicted for the present year is still lower than the figure recorded in 2006, but it clearly indicating towards another year of robust economic growth of euro zone. Joaquin Almunia, the European Union’s monetary affairs commissioner has recently said that fear over Germany’s VAT increase subsided when it failed to dent growth and on the other hand positive signals from the US economy and controlled inflation paved the way for another strong year of economic growth. The EU has also revised its prediction of inflation as it has now been lowered to 1.8 percent against 2.1 percent predicted earlier. Moreover, this is now clear that productivity, competition and strong euro have helped keeping inflation under-control. In addition to it, increasing investment and revival of consumer demand have been contributed to economic recovery of the EU. While indicating towards a soft landing of the US economy Almunia has said that the he thinks that EU could achieve rare feat in 2007 of outstripping US economy. Moreover, this platform when the economy of EU is all set to enter another year of strong economic growth has also provided EU member countries chance to pursue sound public finances and structural reform. However, if wage growth continued to increase at a faster rate than productivity then there are chances that European Central Bank can raise interest rates.
The European Central Bank has recently raised its benchmark interest rate by one-quarter of a percentage point to 3.75 percent, in a move aimed at keeping growth in check and inflation at bay. The bank also indicated that that it was willing to tighten credit market even further. Speculations are high that in this summer following expectations that the European economy could generate inflation, the bank can decide to raise the interest rate further. According to the reports the rate rise was slammed as monetary heavy-handedness by Europe’s unions and French politicians of all stripes. The ECB’s president, Jean-Claude Trichet, has stated that monetary policy for the 13 countries of the euro-zone was still ‘accommodative’, reflecting a warning that further tightening is obviously possible after seven rate rises since December 2005. The ECB also observed that the last-quarter gross domestic product growth was much robust than earlier anticipated, up by 0.9 percent compared to the previous quarter. The solid showing is seen as an indication of continuing strong growth in the euro zone, with both domestic demand and exports making substantial contributions to overall growth. The bank chief affirmed that monetary policy in the euro zone, with 13 countries incorporating 317 million people that account for more than 15 percent of global gross domestic product, will continue to be on the accommodative side or growth stimulating. The recent hike in rates would mean that consumers in the euro zone will now see their mortgage and auto payments going up even as many unions protest for across-the-board salary increases.