Growth outlook for U.S., Japan, euro zone brightens

By Ross Finley

LONDON (Reuters) - Growth prospects for the United States, Japan and the Euro zone are brightening and Britain is set for solid expansion this year, leaving risks for interest rates on the upside, Reuters polls showed on Thursday.

While a slim majority of economists are still calling for the U.S. Federal Reserve to cut rates once this year, recent testimony from Fed Chairman Ben Bernanke has put paid to any such move until the second half at the earliest.

"Persistent higher inflation than expected could result in the Fed remaining on hold for a prolonged period," said Aurore Wannesson-Raynaud, strategist at AXA IM, in Paris, echoing a concern voiced by several economists.

Results from over 150 analysts surveyed also showed that Japan is poised to expand faster this year than thought a month ago, meaning interest rates will probably have to rise above 0.50 percent before year-end.

Still, the chances of another Bank of Japan rate hike in the next few months seem slim and the pace of tightening there is likely to be slow according to a companion poll of dealers taken after the BOJ's decision to raise on Wednesday. <BOJ/INT>

The euro zone looks set to power ahead at a solid 2.2 percent pace this year on the heels of the fastest annual growth in six years, making one and probably two more European Central Bank rate hikes to 4.0 percent likely before mid-year.

In Britain, the outlook is a bit more shaky. Most forecasters are still expecting rates to rise another quarter point to 5.5 percent given a strong outlook for growth -- 2.7 percent this year compared with 2.6 expected a month ago.

But they also expect inflation to fall sharply in the second half of the year to below the 2.0 percent target -- lower than a month ago -- leaving the risk that the Bank of England does nothing further with rates for a long time.

FED RATE CUT CHANCES FADING

While analysts have been clinging for months to their forecasts for lower U.S. rates, those prospects are fading fast, particularly given the Fed's upbeat view on the economy and its continued concerns about inflation.

"Even after seventeen interest rate hikes, monetary conditions remain fairly supportive, with a weak dollar and low long-term interest rates offsetting the restraining impact of higher short-term rates," said Robert Gardner at RBS.

That change comes despite lingering worries that a soft landing so far for the U.S. housing market may still yet unravel. That remains the biggest unknown and biggest risk.

Economists now expect the U.S. economy to grow by 2.7 percent this year -- better than the 2.5 percent forecast in a poll taken a month ago and now in line with the Fed's own central tendency forecast of 2.5-3.0 percent.

Medians in the poll showed Fed rates falling to 5.0 percent from their current 5.25 percent, but not until the fourth quarter -- a marked change from the second quarter in the poll taken one month ago.

With the Fed maintaining a bias to raise rates, a handful expect another tightening and many analysts are now calling for the Fed to hold for all of 2007 on optimism that the housing market has already gone through its worst.

"The Fed is likely to remain on hold for some time, with the next move just as likely to be higher as lower -- however, nothing is likely to propel policy one way or the other over the next several months," said Scott Brown at Raymond James & Associates.

U.S. core consumer price index inflation is expected to cool this year to 2.3 percent by the fourth quarter, but still higher from 2.1 percent in a poll one month ago.

The forecasts were taken before an upside surprise on core CPI reported for January that many analysts said was likely to be reversed as it was based on one-off effects.

For the Euro zone, economists saw inflation falling to 1.9 percent this year, just below the ECB's 2.0 percent ceiling, but also below the 2.1 percent prediction given last month.