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Fund managers fear rate hike could cast pall on market

Bloomberg News

LONDON -- Fund managers worldwide are concerned that interest rate increases later this year could stymie a rally in equity prices that boosted benchmark stock indexes over the past month, according to a survey by Merrill Lynch & Co.

"People are worrying interest rates will come along and spoil the party later in the year," said David Bowers, chief global investment strategist at Merrill Lynch, which surveyed 266 fund managers responsible for a total of $478-billion (U.S.).

As many as 93 per cent of fund managers surveyed said short-term interest rates will be higher in a year's time than they are now, up from 80 per cent last month, Merrill said. Higher interest rates would make fixed-income investments more attractive while raising the cost of borrowing for companies.

The Dow Jones industrial average has risen 9.9 per cent from a year low set Feb. 7. In Europe, the Dow Jones Stoxx 50 has added 8 per cent since reaching a 2002 low on Feb. 20. Auto stocks led gains in both markets as investors judged an economic recovery will boost demand for cars and trucks. Japan's benchmark Nikkei 225 is 12 per cent higher for the year.

Sweden's central bank yesterday became the first in Western Europe to raise interest rates this year, citing concern that a pickup in economic growth may stoke inflation. U.S. Federal Reserve Board officials did not raise rates yesterday, but signalled that hikes are coming.

The Fed cut its key rate 11 times to a 40-year low of 1.75 per cent last year. The European Central Bank trimmed its main rate four times to 3.25 per cent. Central banks throughout the industrialized world will probably start reversing the cuts as growth accelerates, according to the survey.

© 2007 The Globe and Mail. All rights reserved.

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