EU says euro zone growth hits annualised rate of 3.5 pct in H1 2006

The European Commission said euro zone growth accelerated to a record annualised rate of 3.5 pct in the first half of the year, but it warned of increasing downside risks. In its latest euro area quarterly report, the commission said growth has reached a pace not seen in the last six years. "Domestic demand has finally bounced back and has become the main source of growth," it said. "In a context of improving labour market and easing oil prices, the economic outlook could turn out better than expected in the near term," it said. "Further ahead, however, downside risks are set to become more prominent," it said. The commission said recent equity price turbulence shows that risks relating to the macro-financial environment have intensified. Growth is forecast to average 2.5 pct for the year as a whole, according to the commission's autumn forecasts published in September. On monetary policy, it said the European Central Bank's four interest rate increases since December should help ensure medium-to-longer-term inflation expectations remain solidly anchored at levels consistent with price stability. "Even after four interest rate hikes, the current level of interest rates remains low across the entire maturity spectrum and monetary policy continues to be accommodative," it said. The commission said real short-term rates currently stand at around 1 pct. It noted, however, that monetary conditions have "somewhat tightened" in recent months due to the appreciation of the euro and the rise in short-term rates. "At present, financial market participants and many analysts anticipate two further ECB 25 basis points rate increases by the end of the year and consider another hike in the first quarter of 2007 somewhat probable," it said. The ECB is widely expected to raise rates to 3.25 pct at its governing council meeting in Paris on Thursday.