Strong euro zone retail sales bolster case for rate hike tomorrow

Robust euro zone retail sales in August bolster the case for another rise in interest rates at the European Central Bank's governing council meeting in Paris tomorrow, economists said. The data slightly exceeded expectations with a rise of 0.7 pct from July and a year-on-year increase of 2.4 pct. Economists had forecast a month-on-month rise of 0.6 pct and an increase of 2.0 pct from a year earlier. Equally, Eurostat revised July retail sales downwards to a month-on-month rise of 0.4 pct and an increase of 1.9 pct from a year earlier. Its original estimate was for 0.6 pct and 2.5 pct respectively. For August, economists polled by AFX News had forecast a month-on-month rise of 0.6 pct and an increase of 2.0 pct from a year earlier. "The relatively healthy retail sales data add to other evidence that euro zone domestic demand is holding up well at the moment," Global Insight economist Howard Archer said. "This will reinforce the ECB's belief that monetary policy accommodation should continue to be withdrawn despite consumer price inflation dipping below its target rate in September," Archer said. "Consequently, a 25 basis point interest rate hike to 3.25 pct is odds-on for Thursday," he said, adding that a further increase is expected by the end of the year. But Archer questioned whether rates need to go any higher than 3.50 pct, citing fears that euro zone growth will moderate over the coming months in reaction to slower global growth, tighter fiscal policy in several countries, higher interest rates and a firmer euro.