Eurozone cuts its growth targets

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The European Commission has cut its economic growth forecasts for the eurozone, less than a week after the region's interest rates were increased.

Analysts said the cut was in line with expectations that higher interest rates would start to slow global growth.

However, the announcement also came as the growth figure for the three months to 30 June was revised up to 2.7% from the earlier reported 2.6%.

Growth was still strong enough to see a further European rate rise, they said.

Narrower range

According to the Commission, growth in the three months to the end of September will be between 0.4% and 0.8%, compared with an earlier forecast of 0.5%-0.9%.

In the quarter ending 31 December, growth is now predicted to be between 0.2%-0.7%, down from 0.4%-0.9%.

In the first three months of 2007, growth is forecast to be 0%-0.5%, lower than the previous target of 0.2%-0.8%.

Analysts said that the trimming of the forecasts was to be expected, and meant that the eurozone's economy would still expand by about 2.5% in 2006, its best rate of expansion since 2000.

"While the second quarter is likely to have marked the growth peak, economic activity clearly held up relatively well in the third quarter," said Howard Archer, an economist at Global Insight.

Danger zone

Even though they played down the effect of the changes to the growth forecasts, analysts said that there were still dangers to the region's economic environment.

"Slowing global growth, tighter fiscal policy in several countries and higher interest rates threaten to exact an increasing toll on eurozone growth going forward," Mr Archer said, adding that he expected rates to go higher.

"A further 25 basis point interest rate hike to 3.5% in December remains odds-on," he said, warning that the euro may also strengthen as a result, putting extra pressure on growth and demand for exports.

Interest rates across the eurozone - the name used to describe the group of countries that use the single European currency - rose by a quarter of a percentage point to 3.25% last week.

The European Central Bank has vowed to remain "strongly vigilant" on price inflation.

Last week, the Bank of England kept UK interest rates on hold at 4.75%.